e10vk
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
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(Mark One)
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þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended
July 2,
2010
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or
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o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-8703
WESTERN
DIGITAL CORPORATION
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
State or Other Jurisdiction of
Incorporation or Organization
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33-0956711
(I.R.S. Employer
Identification No.)
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20511 Lake Forest Drive
Lake Forest, California
(Address of principal executive
offices)
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92630
(Zip Code)
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Registrants telephone number, including area code:
(949) 672-7000
Securities registered pursuant to Section 12(b) of the
Act:
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Name of each exchange
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Title of each class
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on which registered
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Common Stock, $.01 Par Value Per Share
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New York Stock Exchange
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Rights to Purchase Series A Junior
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New York Stock Exchange
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Participating Preferred Stock
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by checkmark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the registrants common stock
held by non-affiliates of the registrant on December 31,
2009, the last business day of the registrants most
recently completed second fiscal quarter, was approximately
$10.1 billion, based on the closing sale price as reported
on the New York Stock Exchange.
As of the close of business on August 4, 2010,
229,321,305 shares of common stock, par value $.01 per
share, were outstanding.
Documents
Incorporated by Reference
Part III incorporates by reference certain information from
the registrants definitive proxy statement (the
Proxy Statement) for the 2010 Annual Meeting of
Stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after the end of the
2010 fiscal year. Except with respect to information
specifically incorporated by reference in this
Form 10-K,
the Proxy Statement is not deemed to be filed as part hereof.
WESTERN
DIGITAL CORPORATION
INDEX
TO ANNUAL REPORT ON
FORM 10-K
For
the Fiscal Year Ended July 2, 2010
Our fiscal year ends on the Friday nearest to June 30 and
typically consists of 52 weeks. Approximately every five
years, we report a 53-week fiscal year to align our fiscal year
with the foregoing policy. The additional week is typically
included in our fourth fiscal quarter results. Fiscal year 2010,
which ended on July 2, 2010, was comprised of
52 weeks. Fiscal years 2009 and 2008, which ended on
July 3, 2009, and June 27, 2008, respectively, were
comprised of 53 weeks and 52 weeks, respectively.
Unless otherwise indicated, references herein to specific years
and quarters are to our fiscal years and fiscal quarters, and
references to financial information are on a consolidated basis.
As used herein, the terms we, us,
our, the Company and WD
refer to Western Digital Corporation and its subsidiaries.
We are a Delaware corporation that operates as the parent
company of our hard drive business, Western Digital
Technologies, Inc., which was formed in 1970.
Our principal executive offices are located at 20511 Lake Forest
Drive, Lake Forest, California 92630. Our telephone number is
(949) 672-7000
and our Web site is www.westerndigital.com. The information on
our Web site is not incorporated in this Annual Report on
Form 10-K.
Western Digital, WD, the WD logo, WD Caviar, WD VelociRaptor, WD
Scorpio, My Passport, My Book, My DVR Expander, WD Elements, WD
ShareSpace, WD GreenPower Technology, WD TV, PowerArmor,
SiSMART,
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SolidStor, SiSecure, LifeEST, SiliconDrive and SiliconEdge are
trademarks of Western Digital Technologies, Inc.
and/or its
affiliates. All other trademarks mentioned are the property of
their respective owners.
Forward-Looking
Statements
This document contains forward-looking statements within the
meaning of the federal securities laws. Any statements that do
not relate to historical or current facts or matters are
forward-looking statements. You can identify some of the
forward-looking statements by the use of forward-looking words,
such as may, will, could,
would, project, believe,
anticipate, expect,
estimate, continue,
potential, plan, forecasts,
and the like, or the use of future tense. Statements concerning
current conditions may also be forward-looking if they imply a
continuation of current conditions. Examples of forward-looking
statements include, but are not limited to, statements
concerning:
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demand for hard drives and solid-state drives in the various
markets and factors contributing to such demand;
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our plans to continue to develop new products and expand into
new storage markets and into emerging economic markets;
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our entry into and position in the traditional enterprise
market;
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emergence of new storage markets for hard drives;
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emergence of competing storage technologies;
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traditional seasonal demand and pricing trends;
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our beliefs regarding the adequacy of our facilities and
fabrication capacity;
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our share repurchase plans;
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our stock price volatility;
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expectations regarding the outcome of legal proceedings in
which we are involved;
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the timing of future payments, if any, relating to
unrecognized tax benefits;
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expectations regarding industry conditions;
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expectations regarding our capital expenditure plans and our
depreciation and amortization expense in fiscal 2011;
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beliefs regarding the sufficiency of our cash and cash
equivalents to meet our working capital and capital expenditure
needs; and
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expectations concerning our recent acquisition of the media
sputtering operations of Hoya Corporation and Hoya Magnetics
Singapore Pte. Ltd.
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Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those expressed in the forward-looking
statements. You are urged to carefully review the disclosures we
make concerning risks and other factors that may affect our
business and operating results, including those made in
Part I, Item 1A of this Annual Report on
Form 10-K,
and any of those made in our other reports filed with the
Securities and Exchange Commission (the SEC). You
are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of
this document. We do not intend, and undertake no obligation, to
publish revised forward-looking statements to reflect events or
circumstances after the date of this document or to reflect the
occurrence of unanticipated events.
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PART I
General
We design, develop, manufacture and sell hard drives. A hard
drive is a device that uses one or more rotating magnetic disks
(magnetic media) to store and allow fast access to
data. Hard drives are key components of computers, including
desktop and notebook computers (PCs), data storage
subsystems and many consumer electronic (CE) devices.
We sell our products worldwide to original equipment
manufacturers (OEMs) and original design
manufacturers (ODMs) for use in computer systems,
subsystems or CE devices, and to distributors, resellers and
retailers. Our hard drives are used in desktop computers,
notebook computers, and enterprise applications such as servers,
workstations, network attached storage, storage area networks
and video surveillance equipment. Additionally, our hard drives
are used in CE applications, such as digital video recorders
(DVRs), and satellite and cable set-top boxes
(STBs). We also sell our hard drives as stand-alone
storage products by integrating them into finished enclosures,
embedding application software and offering the products as
WD®-branded
external storage appliances for personal data backup and
portable or expanded storage of digital music, photographs,
video and other digital data.
Hard drives provide non-volatile data storage, which means that
the data remains present when power is no longer applied to the
device. Our hard drives currently include 3.5-inch and 2.5-inch
form factor drives, having capacities ranging from 80 gigabytes
(GB) to 2 terabytes (TB), nominal
rotation speeds up to 10,000 revolutions per minute
(RPM), and offer interfaces including Enhanced
Integrated Drive Electronics (EIDE), Serial Advanced
Technology Attachment (SATA) and Serial Attached
SCSI (Small Computer System Interface) (SAS). We
also embed our hard drives into
WD®-branded
external storage appliances using interfaces such as Universal
Serial Bus (USB) 2.0, USB 3.0, external SATA,
FireWiretm
and Ethernet network connections with capacities of 160 GB up to
8 TB. In addition, we offer a family of hard drives specifically
designed to consume substantially less power than standard
drives, utilizing our WD GreenPower
Technologytm.
We also design, develop, manufacture and sell solid-state drives
and media players. A solid-state drive is a storage device that
uses semiconductor, non-volatile media, rather than magnetic
media and magnetic heads, to store and allow fast access to
data. We sell our solid-state drives worldwide to OEMs and
distributors for use in the embedded systems and client PC
markets. A media player is a device that connects to a
users television, the Internet
and/or home
theater system and plays digital movies, music and photos from
any of our
WD®-branded
external hard drives, other USB mass storage devices or content
services accessed over the Internet. We sell our media players
worldwide to resellers and retailers under the
WD®
brand.
In November 2009, we entered the traditional enterprise market
with our WD S25, which is a 2.5-inch, SAS interface hard drive.
The WD S25 drive provides up to 300 GB of storage suitable for
both mission-critical enterprise server and enterprise storage
applications, as well as data centers and large data arrays.
Business
Strategy
Our business strategy is to provide a broad selection of
reliable, high quality hard drives at a low total cost of
ownership and with high efficiency and speed. We believe this
strategy helps accomplish the following:
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distinguishes us in the dynamic and competitive hard drive
industry;
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provides great value to our customers;
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allows us to better achieve consistent financial performance,
including strong returns on invested capital; and
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provides continued diversification of our hard drive product set
and entry into additional markets such as solid-state drives and
media players.
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We have designed our business strategy to accommodate
significant unit and revenue growth with relatively small
increases in operating expenses and to consistently achieve high
asset utilization.
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Industry
We design, develop and manufacture hard drives for the desktop
and mobile PC, enterprise, CE and external hard drive markets.
We believe that growth in the sales of hard drives has continued
to outpace the growth in the sales of all PCs as there were
approximately 86% more hard drives sold in the market than PCs
in calendar 2009, based on industry data. We believe the
following factors continue to drive the growth of hard drive
sales in addition to PC applications:
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consumer use of hard drives for the playing, retention and
creation of digital content for personal use in the rapidly
growing CE market;
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growth of the external hard drive market, permitting the easy
storage, portability and backup of digital data such as music,
photographs or video;
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increased use of multiple hard drives in PCs for data backup and
expanded storage capacity; and
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increased use of multiple cost-optimized high performance hard
drives in data-intensive applications such as Internet-based
search engines and social media, as well as in hard drive
intensive hosts for handheld computing devices.
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Additionally, we believe that the demand for 2.5-inch hard
drives has grown from approximately 16% of the overall hard
drive market in calendar 2003 to 48% of the overall hard drive
market in calendar 2009, driven by the growing markets for
notebook and netbook computers, game consoles and external
storage.
We design, develop and manufacture solid-state drives for the
embedded systems market. We also develop products with
solid-state drive technology for emerging consumer and
commercial computing markets.
We also design, develop and manufacture
WD®-branded
media players for the retail channel. We believe there is a
growing need for consumers to play their personal stored digital
content and premium content from the Internet on their
television and home theater system in connection with the
growing trend in the digitization of rich content and data.
These factors and our product expansion strategy have gradually
increased our percentage of net revenue derived from non-desktop
sources. In 2010, 64% of our net revenue was from non-desktop
sources compared to 62% in 2009 and 56% in 2008.
For an additional discussion of risks relating to the hard drive
industry, please see Item 1A of this Annual Report on
Form 10-K.
Desktop
PC Market
The desktop PC market consists of personal computers in a form
intended for regular use at a single location. Individuals use
desktop computers in homes, businesses and multi-user networks.
Desktop computers use software applications for word processing,
spreadsheet, desktop publishing, database management,
multimedia, entertainment and for other needs. Hard drives store
the desktop computer operating system and application software,
as well as the data used by the applications.
We believe that the demand for hard drives in the desktop PC
market has grown in part due to:
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growth in emerging markets;
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recovery in the commercial market;
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the overall growth of desktop computer sales;
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the increasing needs of businesses and individuals for increased
storage capacity on their desktop computers;
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the continuing development of software applications to manage
and create multimedia content; and
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the increasing use of broadband Internet, including content
downloaded from the Internet onto desktop computer hard drives.
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We believe several other factors affect the rate of desktop
computer unit growth, including growth of notebook and netbook
computers, an increase in first-time buyers of desktop computers
in Asia, Eastern Europe and Latin America,
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maturing desktop PC markets in North America and Western Europe,
and the lengthening of desktop computer replacement cycles.
Mobile PC
Market
The mobile PC market consists primarily of notebook and netbook
computers. Individuals use mobile computers both in and away
from homes and businesses. Like desktop computers, mobile
computers use software applications for various needs. Hard
drives store the mobile computer operating system and
application software, as well as the data used by the
applications.
We believe that the demand for hard drives in the mobile PC
market has grown in part due to:
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the overall growth of mobile sales, including increased
transition from desktop computers to mobile computers;
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the increased mobility of the workforce;
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the increasing needs of businesses and individuals for increased
storage capacity on their mobile computers;
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the continuing development of software applications to manage
multimedia content; and
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the increasing use of broadband Internet, including content
downloaded from the Internet onto mobile hard drives.
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We expect the mobile PC market to continue to grow faster than
the desktop or enterprise markets in the next five years. As the
mobile PC market continues to evolve to a higher volume market,
we believe customers are placing increased emphasis on
attributes such as quality, availability, reliability,
execution, flexibility, capacity, performance, power and the
competitive cost structures of their hard drive suppliers. These
are the same attributes that have been emphasized for many years
by customers in the high-volume desktop PC market.
Enterprise
Market
The enterprise market for hard drives includes workstations,
servers, network attached storage, storage area networks, other
computing systems or subsystems, network-communications and
video surveillance. Hard drives for this market utilize three
principal interfaces; Fibre Channel Arbitrated Loop
(FC-AL); SAS interface technology; or SATA. SATA
hard drives typically cost customers less than SAS or FC-AL hard
drives while offering higher capacities and maintaining similar
reliability, scalability and performance.
We believe that enterprise uses of SATA hard drives will
continue to increase. During the past few years, a new
application has emerged with high-capacity SATA hard drives
augmenting FC-AL and SAS hard drives, tape and optical media.
This application, popularly referred to as near-line
storage, has created a growth market because SATA hard drives
access data more quickly than tape or optical solutions, quickly
retrieve critical
back-up or
near-line data and are more cost effective than FC-AL and SAS
hard drives. The low price per capacity of SATA drives has
stimulated applications such as video surveillance, video
editing/broadcasting and medical imaging. These applications
represent segments of a growing market for high capacity storage
in non-computing imaging and multimedia professions.
Enterprise-class SATA drives are becoming commonplace for
IT infrastructure applications such as databases, scientific
computing, surveillance, web content, web caching, web search
engines and electronic mail. These applications have become an
important market for high-capacity SATA hard drives. We believe
that this market will consume a growing portion of the highest
capacity hard drives in the next three years.
SATA technology is compatible with SAS technology, enabling
customers the flexibility of incorporating SATA hard drives in
SAS storage systems. We believe the units shipped in the
enterprise-class SATA market was approximately 36% of the
enterprise hard drive market in calendar 2009.
High-performance server applications, including blade servers,
are increasingly using 2.5-inch form factor hard drives,
supplanting traditional 3.5-inch drives. Smaller form factors
enable more drives per physical space for increased performance,
higher capacity per square foot and lower power consumption.
This trend demonstrates the fragmentation of the enterprise hard
drive market and the need for application-specific
enterprise-class hard drives.
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There is a trend towards centralization of information storage
and delivery of Internet-based services through cloud computing.
Cloud computing delivers shared resources, software and
information to users on demand on a multitude of devices, such
as client PCs and handheld computing devices. Most cloud
computing models consist of services delivered through common
data centers that utilize servers and hard drives designed for
the enterprise market. The infrastructure to support cloud
computing storage needs is driving the demand for both SAS and
SATA enterprise-class hard drives.
Consumer
Electronics Market
The use of hard drives in CE products has been a major growth
area in recent years. Currently, the two largest segments of
this market are:
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video content in applications such as DVRs; and
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hard drives in game consoles.
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DVRs are available for use in home entertainment systems and
offer enhanced capabilities such as pausing live television,
simplifying the process of recording and cataloging recorded
television programs and quickly forwarding or returning to any
section of a recorded television program. Additionally, digital
video disk (DVD) recorders increasingly incorporate
hard drives to allow for DVR functionality and faster recording
of content onto removable DVDs. The market for these products
favors larger capacity hard drives and continues to grow
globally. We believe growth in this market will continue to
build demand for higher capacity hard drives.
Game consoles are increasingly incorporating hard drives to
improve the user experience. Hard drive technology enables users
to save games, movies, music, pictures and other user generated
content.
The proliferation in the CE market of more sophisticated mobile
devices, including smartphones, portable media players and
tablet computers, is driving the delivery of diverse content
from hard drive intensive hosts. We believe this is one of the
factors influencing increased sales of
enterprise-class SATA drives. We also believe that
multimedia handheld devices, such as video cameras and
high-resolution still cameras, are enabling consumer production
of expansive digital content that requires increasing amounts of
small form-factor hard drive storage, as well as high-capacity
desktop-class hard drives for editing, manipulation and
long-term storage of such content.
External
Hard Drive Market
Most new PC systems include high-speed external interfaces, such
as USB 2.0, USB 3.0, external SATA,
FireWiretm
or Ethernet network connections, that permit users to supplement
the storage space of their PC systems or home and small office
networks with the use of external hard drives. Users store
additional programs or multimedia content, and back up internal
hard drives with external hard drives, as well as use mobile
external hard drives for portability and security. External
storage can often be the easiest, quickest or only way of adding
additional storage capacity to either a desktop or notebook
computer. We believe there is an increasing consumer awareness
of the need and value of securely storing personal digital
content through backup applications and devices. We believe
there is a growing need for external storage as a way of
expanding storage capacity in CE devices such as DVRs. We also
believe there is a growing need for media players that enable
consumers to play digital movies and music, view photos, and
access the Internet, otherwise limited to being viewed on
computer screens, from USB mass storage devices on their
television or home theater system.
Solid-State
Drive Market
The solid-state drive market consists primarily of solid-state
drives which use semiconductor, non-volatile media that retains
data even when power is not applied using either single-level
cell or multilevel cell NAND media.
We believe that the demand for solid-state drives in certain
markets has grown in part due to:
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the increasing performance, measured by input/output per second,
in enterprise applications;
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the increasing premium performance applications in the desktop
and notebook markets; and
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the increasing requirements of the embedded systems market for
high durability and long life cycles.
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We expect the solid-state drive market to grow faster on a
compounded annual growth rate basis than the hard drive market
over the next four years, but will still remain a small portion
of the total storage market on a unit basis.
Other
Market Opportunities
We regularly review opportunities to apply our knowledge of data
storage technology to markets that we do not currently serve.
Based on significant investments we made over the last six
years, we believe we have the technology building blocks to
increase our overall market penetration and be a full-line hard
drive supplier. Consistent with our measured and deliberate
approach to new market entries in the recent past, our approach
to additional new markets will be based on a careful assessment
of the risks, rewards, requirements and profit potential of such
actions.
Products
We offer a broad line of hard drives designed for various
markets. We market our hard drives under brand names including
WD
Caviar®,
WD RE, WD
VelociRaptor®,
WD
Scorpio®,
WD
Elementstm,
WD AV, WD
ShareSpacetm,
WD S25, My
Passport®,
My
Book®,
and My DVR
Expandertm.
These hard drives service the desktop PC, mobile PC, enterprise,
CE and external hard drive markets, and can be found in products
including desktop computers, notebook computers, enterprise
storage, server, workstations, video surveillance equipment,
networking products, DVRs, STBs and external storage appliances.
We also offer a line of
WD®-branded
media players under the WD
TVtm
brand name, as well as a line of solid-state drives under the
SiliconDrive®
and
SiliconEdge®
brand names.
Desktop
Hard Drive Products
The hard drives we design for the desktop PC market currently
consist of 3.5-inch form factor products with capacities ranging
from 80 GB to 2 TB. These products utilize either the EIDE or
SATA interfaces, providing high performance while retaining ease
of use and overall low cost of connection. The type of EIDE
interface currently used in our hard drives is ATA/100, which
signifies a burst data transfer rate of 100 megabytes per
second, which is the maximum specified data transition that can
be sustained under ideal conditions. The SATA interface
available in the majority of our hard drives enables burst
transfer rates of up to 6 gigabits (Gb) per second.
Mobile
Hard Drive Products
Our hard drives used in mobile products typically include
2.5-inch form factor products with capacities ranging from 80 GB
to 1 TB. Unit shipments into the mobile PC market currently
represents the largest market for hard drives. Our product
expansion, including a high-performance hard drive spinning at
7,200 RPM and producing ultra-high capacities for specific
applications with a three platter platform, has enabled us to
provide customers with a full-line of 2.5-inch mobile drives and
helped us enhance our market position in this fast-growing
market.
Enterprise
Hard Drive Products
We offer multiple product lines to address enterprise market
needs, including:
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the WD S25 drive, which provides up to 300 GB of storage
suitable for both mission-critical enterprise server and
enterprise storage applications, as well as data centers and
large data arrays;
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the WD
VelociRaptor®
drive, which is a 600 GB, 10,000 RPM, 2.5-inch enterprise-class
drive with the SATA interface for enterprise applications
requiring high performance and high reliability;
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the
WD®
RE family of drives, with capacities ranging from 160 GB to 2
TB. The
WD®
RE family serves the SATA market and has enhanced reliability
features and ratings when contrasted to our desktop
products; and
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low-power versions of the
WD®
RE family of drives featuring WD GreenPower
Technologytm,
which reduces power consumption as much as 40 percent
compared with standard hard drives. Lower power consumption
reduces total cost of ownership for our customers by cutting
energy costs and lowering operating temperatures, which
contributes to longer reliability.
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WD S25, WD
VelociRaptortm
and
WD®
RE drives may be used in, but are not limited to, applications
such as databases,
e-commerce
and super computing in life science, oil and gas and similar
industries, business records
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management,
e-mail, file
serving, web serving, near-line storage, medical records,
engineering data management, video broadcasting and video
security. The WD
VelociRaptortm
also has been popular for use in the high-end desktop PC market
for applications including gaming, servers and advanced CAD/CAM
(computer-aided design/computer-aided manufacturing) systems.
Consumer
Electronics Products
We offer a line of hard drives under the
WD®
AV brand that are designed for use in products such as DVRs,
STBs, karaoke systems, multi-function printers and gaming
systems.
WD®
AV drives deliver the characteristics CE manufacturers seek
most, which are quiet operation, low operating temperature, low
power consumption specifications, high reliability and optimized
streaming capabilities. We also offer low-power
WD®
AV drive models that feature the WD GreenPower
Technologytm.
Lower power consumption in our
WD®
AV drives results in cooler operation, which enhances long-term
reliability. Our WD GreenPower
Technologytm
also quiets drive operation, which is an important attribute for
our CE customers.
Branded
Products
We sell a broad line of
WD®-branded
hard drive-based storage appliances, which are internal drives
embedded into PC peripheral-style enclosures that have USB 2.0,
USB 3.0, external SATA,
FireWiretm
and Ethernet network connections and include software that
assists customers with back up, remote access and management of
digital content. We sell these branded storage appliances, as
well as related adapters and accessories, through retail store
fronts, online stores and distributors. These include:
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the 3.5-inch hard drive-based My
Book®
family of storage appliances, which are designed to reside on
desktops as PC peripherals, as well as be connected to networks,
and to simplify storage for mainstream consumers, and offer from
500 GB to 4 TB of capacity;
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the 3.5-inch My DVR
Expandertm
series of external SATA (eSATA) and USB 2.0 storage
appliances, which adds recording time to STBs with DVR
capability. In addition, My
Book®
AV DVR Expander also allows for the transfer and storage of
videos from certain camcorders;
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the WD
ShareSpacetm
network-attached storage system, which offers capacities as high
as 8 TB for home office or small office applications;
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the 2.5-inch hard drive-based My
Passporttm
and WD
Elementstm
Portable series of USB 2.0 and
FireWiretm
storage devices, which, weighing less than one-half of a pound,
offer from 250 GB to 1 TB of portable storage capacity. In
addition, My
Passporttm
AV also allows for the transfer and storage of videos from
certain camcorders; and
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3.5-inch and 2.5-inch internal hard drives packaged with PC
installation kits under the
WD®
brand for retail store sales.
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We also sell a line of
WD®-branded
media players which are devices that enable users to play
digital movies, music and photos from any of our
WD®-branded
external hard drives, other USB mass storage devices or the
Internet, on a television or home theater system, independent of
the PC. Our media players provide rich, high-definition playback
and navigation up to 1080p, multiple ports to connect to
multiple mass storage devices and access them simultaneously,
high-definition multimedia interface ports to connect to the
highest quality HDTV or home theater system and composite
outputs to ensure compatibility with virtually all television
sets.
Solid-State
Drive Products
We offer a line of solid-state drives under the
SiliconDrive®
and WD
SiliconEdge®
brands that provide advanced storage technologies for the
embedded systems and client PC markets. Our
SiliconDrive®
product family consists of 2.5-inch, Compact Flash
(CF) and other small form factors with capacities
ranging from 32 megabytes (MB) to 120 GB,
interfaces that include SATA and Parallel Advanced Technology
Attachment (PATA)/EIDE/CF and read/write speeds of
up to 100/80 MB per second. Our
SiliconDrive®
products address the stringent embedded systems market
requirements and ensure data integrity, eliminate unscheduled
downtime, protect application data and software and provide for
data
9
security and protection through our patented and patent-pending
PowerArmor®,
SiSMART®,
SolidStor®,
SiSecuretm
and
LifeESTtm
technologies. Our WD
SiliconEdge®
product family consists of 2.5-inch form factors, with
capacities ranging from 64 GB to 256 GB, SATA interfaces, and
read/write speeds of up to 250/170 MB per second. Our WD
SiliconEdge®
products are designed for both read-intensive client and
consumer applications and write-intensive OEM applications. They
also feature both multi-level cell and single-level cell
semiconductor media as well as patented and patent-pending
technologies, such as advanced wear-leveling, error correction
control, and industry standard performance optimization commands
such as TRIM and Native Command Queuing to ensure maximum drive
performance and endurance with easy plug and play compatibility.
Research
and Development
We devote substantial resources to development of new products
and improvement of existing products. We focus our engineering
efforts on coordinating our product design and manufacturing
processes to bring our products to market in a cost-effective
and timely manner. Research and development expenses totaled
$611 million, $509 million and $464 million in
2010, 2009 and 2008, respectively.
Fiscal 2010 represented the ninth consecutive year of
substantial growth in our research and development spending to
support the significant broadening of our product and technology
portfolios. Consistently over that nine-year period, we grew our
research and development spending 441% from $113 million in
fiscal 2001 to $611 million in fiscal 2010. As a result of
this investment activity, we continue to expand our business
beyond the desktop PC market into newer markets or markets in
which we have not previously participated. Such investments have
allowed us to execute against our strategic objective of revenue
diversification to address the growth of new applications for
hard drives and fast-growing new market opportunities.
For an additional discussion of risks related to our development
of new products, see Item 1A of this Annual Report on
Form 10-K.
Technology
and Product Development
Hard drives record, store and retrieve digital data. Performance
attributes of hard drives, such as their ability to access and
transmit data and storage capacity, are currently better than
removable disks, optical hard drives and tapes, and they are
more cost-effective than semiconductor technology. The primary
measures of hard drive performance include:
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Acoustics which is the sound power
emitted during hard drive operation, commonly expressed in
decibels, and perceived loudness due to sound pressure, commonly
expressed in sones.
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Data transfer rate which is the
sustained rate of data transfer to and from the disk, commonly
expressed in gigabits per second. One gigabit equals one billion
bits.
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Seek time which is the time needed to
position the heads over a selected track on the disk surface,
commonly expressed in milliseconds.
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Spindle rotation speed which is the
nominal rotation speed of the disks inside the hard drive,
commonly expressed in RPM or latency. Spindle rotation speeds
commonly stated as 5,400, 7,200 and 10,000 RPM are sometimes
approximations.
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Storage capacity which is the amount of
data that can be stored on the hard drive, commonly expressed in
GB or TB. As defined in the hard drive industry, one GB equals
one billion bytes and one TB equals one trillion bytes. A byte
is a digital character, typically comprised of eight bits. A bit
is a binary digit, the smallest unit of information in a digital
system.
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Power Consumption which is the amount of
electricity required to operate the drive, measured in watts.
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All of our hard drive products employ similar technology. The
main components of the hard drive are a Head-Disk-Assembly
(HDA) and a Printed Circuit Board Assembly
(PCBA).
HDA: The HDA includes heads, magnetic media, head positioning
mechanism (actuator) and spindle motor. A rigid base
and top cover contain these components in a
contamination-controlled environment. One or more disks
positioned around a motor-driven spindle hub that rotates the
disks comprise the disk-pack assembly. The disk is made
10
up of a smooth substrate on which thin layers of magnetic
materials are deposited. The head stack assembly
(HSA) is comprised of a magnetic positioner, a
pivot-arm module, on which the individual heads are mounted.
Each disk has a head suspended directly above it, which can read
data from or write data to the spinning disk.
PCBA: The PCBA includes both standard and custom integrated
circuits, an interface connector to the host computer and a
power connector. The integrated circuits on the printed circuit
board typically include a drive interface and a controller. The
drive interface receives instructions from the host computer,
while the controller directs the flow of data to or from the
disks and controls the heads. The location of data on each disk
is logically maintained in concentric tracks divided into
sectors. The host computer sends instructions to the controller
to read data from or write data to the disks, based on logical
track and sector locations. Guided by instructions from the
controller, the HSA pivots in an arc across the disk until it
reaches the selected track of a disk, where the data is recorded
or retrieved.
Industry-standard interfaces allow the hard drive to communicate
with the computer. Currently, the primary interfaces for PCs are
PATA and SATA. The primary interfaces for enterprise systems are
SATA, and the following, which we refer to as traditional
enterprise: SCSI, SAS and FC-AL. As computer performance
continues to improve, the hard drive will need to deliver
information faster. We believe this will continue to drive the
transition of the PC industry to higher speed interfaces, such
as SATA and SAS, to facilitate the higher data transfer rates.
We currently offer the SATA interface on our WD
Caviar®,
WD
Scorpio®,
WD®
RE, WD
VelociRaptor®
and
WD®
AV hard drive families; the PATA interface on WD
Caviar®,
WD
Scorpio®
and
WD®AV
hard drive families; and the SAS interface on the WD S25 hard
drive family.
The number of disks and each disks areal density (track
density multiplied by bit density), which is a measure of the
amount of data that can be stored on the recording surface of
the disk per unit area, determines storage capacity of the hard
drive. The higher the areal density, the more information can be
stored on a single platter. Achieving a given drive capacity
requires fewer disks and heads as the areal density increases,
potentially reducing product costs over time through reduced
component requirements. In September 2009, we began shipping our
WD
Caviar®
Blacktm
3.5-inch 2 TB drives at 500 GB per platter areal density. In
March 2010, we began shipping our WD
Scorpio®
Bluetm
2.5-inch 750 GB drives at 375 GB per platter areal density.
Head technology is one of the key components affecting areal
density. The hard drive industry has transitioned from the use
of longitudinal magnetic recording (LMR) head
technology for the head writer function to perpendicular
magnetic recording (PMR) technology, which allows
for significantly higher storage capacities. In addition, the
industry has made the transition to tunnel-junction magneto
resistive (TMR) technology for the head reader
function. We have completed the transition to PMR and TMR across
all of our product platforms.
With the transition to PMR, magnetic media plays a much more
important role in achieving higher areal density. PMR demands a
much tighter interaction and matching between head and magnetic
media designs. We are vertically integrated in the two most
important technology components of hard drives (heads and
magnetic media), which has enabled us to achieve a more optimum
design and utilization of these components.
We invest considerable resources in research and development,
manufacturing infrastructure and capital equipment of head and
magnetic media components, in order to secure our competitive
position and cost structure.
Solid-state drives record, store and retrieve digital data
without any moving parts. Attributes, such as fast read/write
speeds, low power consumption and robust durability offer
greater performance than hard drives in some storage
applications but are currently much more costly per GB and are
available in much lower capacity points than hard drives. The
main components of a solid-state drive are the
system-on-chip
and semiconductor media. The capacity of a solid-state drive is
based on the total number of MB or GB of semiconductor media in
the solid-state drive. Industry-standard storage interface
protocols, such as SATA, PATA/CF and USB 2.0, allow the
solid-state drive to communicate with the host system.
The
WD®
product lines generally leverage a common platform for various
products within product families with different capacities to
serve differing market needs. This platform strategy results in
commonality of components across different products within
product families and, in some cases, across product families,
which reduces exposure to changes in demand, facilitates
inventory management and allows us to achieve lower costs
through purchasing economies. This platform strategy also
enables our customers to leverage their qualification efforts
onto successive product models.
11
For an additional discussion of risks related to technological
innovations, see Item 1A of this Annual Report on
Form 10-K.
Sales and
Distribution
We sell our products globally to OEMs, ODMs, distributors and
retailers. OEMs purchase our products, either directly or
through a contract manufacturer such as an ODM, and assemble
them into the computer or CE systems they build. Distributors
typically sell our products to non-direct customers such as
small computer and CE manufacturers, dealers, systems
integrators, online retailers and other resellers. Retailers
typically sell our products directly to end-users through their
storefront or online facilities.
Original
Equipment Manufacturers
Sales to OEMs, which include sales through ODMs, accounted for
51%, 54% and 51% of our net revenue in 2010, 2009 and 2008,
respectively. For 2010 and 2008, no single customer accounted
for 10% or more of our net revenue. For 2009, sales to Dell Inc.
accounted for 10% of our net revenue. We believe that our
success depends on our ability to maintain and improve our
strong relationships with the leading OEMs.
OEMs evaluate and select their hard drive and solid-state drive
suppliers based on a number of factors, including quality and
reliability, storage capacities, performance characteristics,
price, service and support, ease of doing business and the
suppliers long-term financial stability. OEMs typically
seek to qualify two or more providers for each generation of
products, and once an OEM has chosen its qualified vendors for a
given product, it generally will purchase products from those
vendors for the life of that product. To achieve success with
OEM qualifications, a supplier must consistently offer products
featuring leading technology, quality and reliability at
acceptable capacity. Suppliers must quickly achieve volume
production of each new generation of high quality and reliable
hard drives or solid-state drives, requiring access to flexible,
high-capacity, high-quality manufacturing capabilities.
Many of our OEM customers utilize
just-in-time
inventory management processes or supply chain business models
that combine
build-to-order,
in which they do not build until there is a firm order, and
contract manufacturing, in which the OEM contracts
assembly work to a contract manufacturer, such as an ODM, who
purchases components and assembles the computer based on the
OEMs instructions. For certain OEMs, we maintain a base
stock of finished goods inventory in facilities located near or
adjacent to the OEMs operations.
For an additional discussion of risks related to our need to
adapt to our customers business models and maintain
customer satisfaction, refer to Item 1A of this Annual
Report on
Form 10-K.
Distributors
We use a broad group of distributors to sell our products to
non-direct customers such as small computer and CE
manufacturers, dealers, systems integrators, online retailers
and other resellers. Distributors accounted for approximately
31%, 26% and 31% of our net revenue for 2010, 2009 and 2008,
respectively. Distributors generally enter into non-exclusive
agreements for specific territories with us for the purchase and
redistribution of our products in those territories. We grant
our distributors limited price protection.
Retailers
We sell our branded products directly to a select group of major
retailers such as computer superstores, warehouse clubs, online
retailers, and computer electronics stores, and authorize sales
through distributors to smaller retailers. Retailers accounted
for approximately 18%, 20% and 18% of our net revenue for 2010,
2009 and 2008, respectively. The retail channel complements our
other sales channels while helping to build brand awareness for
WD and our products. Retailers supply end-users with our
products to upgrade their computers, externally store their data
for backup or mobility purposes and play their stored digital
content or content accessed over the Internet on their
television or home theater systems. We grant our retailers
limited price protection. We also sell our branded products
through our Web site.
12
Sales and
Marketing
We maintain sales offices in selected parts of the world
including the major geographies of the Americas, Asia Pacific,
Europe and the Middle East. Our international sales, which
include sales to foreign subsidiaries of United States
(U.S.) companies but do not include sales to
U.S. subsidiaries of foreign companies, represented 81%,
80% and 76% of our net revenue for 2010, 2009 and 2008,
respectively. Sales to international customers may be subject to
certain risks not normally encountered in domestic operations,
including exposure to tariffs and various trade regulations. For
an additional discussion regarding the risks related to sales to
international customers, see Item 1A of this Annual Report
on
Form 10-K.
For additional information concerning revenue recognition, sales
by geographic region and major customer information, see
Part II, Item 8, Notes 1 and 6 in the Notes to
Consolidated Financial Statements, included in this Annual
Report on
Form 10-K.
We perform our marketing and advertising functions internally
and through outside firms. We target advertising, worldwide
packaging and marketing materials to various reseller and
end-user categories. We utilize both consumer media and trade
publications. We have programs under which we reimburse
qualified distributors and retailers for certain marketing
expenditures. We also maintain customer relationships by
communicating with our resellers and providing end-users with
information and support through our Web site.
Competition
We compete primarily with manufacturers of hard drives for use
in desktop, notebook, enterprise, CE and external storage
products. Our competitors in the hard drive market include
companies such as Hitachi Global Storage Technologies, Samsung
Electronics Co. Ltd., Seagate Technology and Toshiba Corporation.
The hard drive industry is intensely competitive, with hard
drive suppliers competing for sales to a limited number of major
customers. Hard drives manufactured by different competitors are
highly substitutable due to the industry mandate of technical
form, fit and function standards. Hard drive manufacturers
compete on the basis of product quality and reliability, storage
capacity, unit price, product performance, production volume
capabilities, delivery capability, leadership in
time-to-market,
time-to-volume
and
time-to-quality,
service and support and ease of doing business. The relative
importance of these factors varies by customer and market. We
believe that we are generally competitive in all of these
factors.
We believe that there are no substantial barriers for existing
competitors to offer competing products. Therefore, we believe
that we cannot differentiate
WD®
hard drive products solely on attributes such as storage
capacity, buffer size or
time-to-market.
Accordingly, we differentiate WD by focusing on operational
excellence, high product quality and reliability, and designing
and incorporating into our hard drives desirable product
performance attributes. Such performance attributes include seek
times, data transfer rates, intelligent caching, failure
prediction, remote diagnostics, acoustics, error recovery, low
operating temperature, low power consumption and optimized
streaming capabilities.
In addition, we differentiate WD by emphasizing non-product
related attributes, including rapid response to our customers.
Rapid response requires accelerated design cycles, customer
delivery, production flexibility and timely service and support,
which contribute to customer satisfaction. We also rely on the
strength of the WD brand name with value-added resellers,
retailers and solution providers to whom we sell our hard drive
products directly and indirectly. We believe that trust in a
manufacturers reputation, its execution track record and
the establishment of strategic relationships have become
important factors in the selection of a hard drive, particularly
in a rapidly changing technology environment.
Advances in magnetic, optical or other data storage technologies
could result in competitive products with better performance or
lower cost per unit of capacity than our products. We monitor
the advantages, disadvantages and advances of the full array of
storage technologies on an ongoing basis.
High-speed semiconductor media competes with hard drive products
in some applications, such as consumer handheld devices and
portable external storage. Semiconductor media is much faster in
some applications than magnetic hard drives, but currently is
not competitive in most applications using 3.5-inch and 2.5-inch
form factor hard drives from a cost standpoint. Flash memory, a
non-volatile semiconductor media, is currently much more costly
and, while it
13
has higher read performance attributes than hard
drives, it has lower write performance attributes.
Flash memory could become more competitive in the near future
for additional applications requiring less storage capacity than
that provided by hard drives. However, we believe that the
traditional high-volume computing markets will remain the domain
of 3.5-inch and 2.5-inch hard drives based on the hard drive
industrys attributes of reliability, availability, storage
capacity and cost.
Our competitors in the external hard drive market include
companies such as EMC Corporation, Hitachi Global Storage
Technologies, LaCie S.A., Melco Holdings Inc. and Seagate
Technology. Our competitors in the solid-state drive market
include companies such as Intel Corporation, Micron Technology,
Inc., Samsung Electronics Co. Ltd., Smart Modular Technologies,
Inc. and STEC, Inc. Our competitors in the media player retail
market include companies such as Apple Inc., EMC Corporation,
LaCie S.A., Roku, Inc. and Seagate Technology.
For an additional discussion of risks related to competition,
see Item 1A of this Annual Report on
Form 10-K.
Seasonality
We have historically experienced seasonal fluctuations in our
business with higher levels of demand in the first and second
quarters of our fiscal year. This seasonality is a result of
consumer spending at the beginning of the school year and during
the holiday season.
Service
and Warranty
We generally warrant our newly manufactured products against
defects in materials and workmanship from one to five years from
the date of manufacture depending on the type of product. Our
warranty obligation is generally limited to repair or
replacement. We have engaged third parties in various countries
in multiple regions, including Africa, Asia Pacific, Australia,
Europe, India, Latin America, the Middle East and North America,
to provide various levels of testing, processing
and/or
recertification of returned products for our customers.
Manufacturing
We believe that we have significant know-how, unique product
manufacturing processes, execution skills and human resources to
continue to be successful and have the ability to grow, as
necessary, our manufacturing operations. To be competitive, we
must manufacture high quality hard drives with industry leading
time-to-volume
production at competitive unit costs. We strive to maintain
manufacturing flexibility, high manufacturing yields, reliable
products, and high-quality components that we manufacture
ourselves, while insisting that our suppliers provide
high-quality components at competitive prices. The critical
elements of our hard drive production are high volume and
utilization, low cost assembly and testing, and establishment
and maintenance of key supplier relationships. By establishing
close relationships with our strategic component suppliers, we
believe we access
best-of-class
technology and manufacturing quality. In addition, we believe
that our sourcing strategy currently enables us to have the
business flexibility needed to select the highest quality, low
cost of ownership suppliers as product designs and technologies
evolve.
Hard drive manufacturing is a complex process involving the
assembly of precision components with narrow tolerances and
thorough testing. The assembly process occurs in a clean
room environment that demands skill in process engineering
and efficient space utilization to control the operating costs
of this manufacturing environment. Our clean room manufacturing
process consists of modular production units, each of which
contains a number of work cells.
We manufacture hard drives in Malaysia and Thailand. We
continually evaluate our manufacturing processes in an effort to
increase productivity, sustain and improve quality and decrease
manufacturing costs. We continually evaluate which steps in the
manufacturing process would benefit from automation and how
automated manufacturing processes can improve productivity and
reduce manufacturing costs.
We use our wafer fabrication facilities in Fremont, California
and our slider fabrication facility in Bang Pa-In, Thailand, to
design and manufacture a substantial portion of the heads and
head gimbal assemblies (HGAs) we include in the hard
drives we manufacture.
14
We have magnetic media and substrate design and manufacturing
facilities in Malaysia. We also have a magnetic media design and
manufacturing facility in Singapore. We use these facilities to
design and manufacture most of the magnetic media and substrates
that we use in our products.
We leverage the efficiencies of contract manufacturers when
strategically advantageous.
For an additional discussion of risks related to manufacturing,
see Item 1A of this Annual Report on
Form 10-K.
Materials
and Supplies
The following products are the major components currently used
in the manufacture of our hard drives:
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magnetic heads and magnetic media;
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suspensions with related HGAs and HSAs;
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spindle motors;
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custom and standard electronics such as
system-on-chip,
magnetic media, motor controllers,
pre-amps and
printed circuit boards;
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base and top covers; and
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magnets and related voice coil motors.
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We also use several other components in our hard drives such as
seals, filters, plastic molded parts, capacitors, resistors,
connectors and cables.
We design and manufacture a substantial portion of the heads and
magnetic media required for the hard drives we manufacture. We
purchase a portion of these components from third party
suppliers. We acquire all of the remaining components for our
products from third party suppliers.
The major components used in the manufacture of our solid-state
drives (the semiconductor media and
system-on-chip)
and in our media player (the controller) are acquired from third
party suppliers.
We generally retain multiple suppliers for each of our component
requirements but in some instances use sole sources for business
reasons. We believe that components are generally available.
For an additional discussion of risks related to our component
supplies, see Item 1A of this Annual Report on
Form 10-K.
Backlog
A substantial portion of our orders are generally for shipments
within 30 to 60 days of the placement of the order. We
generally negotiate pricing, order lead times, product support
requirements and other terms and conditions before receiving a
customers first purchase order for a product.
Customers purchase orders typically may be canceled with
relatively short notice to us, with little or no cost to the
customer, or modified by customers to provide for delivery at a
later date. In addition, we make many of our sales to OEMs under
just-in-time
delivery contracts that do not generally require firm order
commitments by the customer until the time of sale. Instead, we
receive a periodic forecast of requirements from the customer
and invoice the customer upon shipment of the product from the
just-in-time
warehouse. Therefore, backlog information as of the end of a
particular period is not necessarily indicative of future levels
of our revenue and profit and may not be comparable to earlier
periods.
Patents,
Licenses and Proprietary Information
We own numerous patents and have many patent applications in
process. We believe that, although our patents and patent
applications have considerable value, the successful
manufacturing and marketing of our products depends primarily
upon the technical and managerial competence of our staff.
Accordingly, the patents held and applied for do not ensure our
future success.
15
In addition to patent protection of certain intellectual
property rights, we consider elements of our product designs and
processes to be proprietary and confidential. We believe that
our non-patented intellectual property, particularly some of our
process technology, is an important factor in our success. We
rely upon non-disclosure agreements and contractual provisions
and a system of internal safeguards to protect our proprietary
information. Despite these safeguards, there is a risk that
competitors may obtain and use such information. The laws of
foreign jurisdictions in which we conduct business may provide
less protection for confidential information than the U.S.
We rely on certain technology that we license from other parties
to manufacture and sell WD products. We believe that we have
adequate cross-licenses and other agreements in place in
addition to our own intellectual property portfolio to compete
successfully in the hard drive industry. For additional
discussion of risks related to our ownership and use of
intellectual property, see Item 1A of this Annual Report on
Form 10-K.
Environmental
Regulation
We are subject to a variety of regulations in connection with
our operations. We believe that we have obtained or are in the
process of obtaining all necessary environmental permits for our
operations. For additional discussion of risks related to
environmental regulation, see Item 1A of this Annual Report
on
Form 10-K.
Employees
As of July 2, 2010, we employed a total of approximately
62,500 employees worldwide. This represents an increase in
headcount of approximately 36% since July 3, 2009 and an
increase of approximately 25% since June 27, 2008. Many of
our employees are highly skilled, and our continued success
depends in part upon our ability to attract and retain such
employees. Accordingly, we offer employee benefit programs,
which we believe are, in the aggregate, competitive with those
offered by our competitors. We and most of our competitors
nevertheless have difficulty at times hiring and retaining
certain skilled employees. We have engaged consultants and
contract personnel to fill these needs until full-time employees
could be recruited. We consider our employee relations to be
good. For additional discussion of risks related to our skilled
employees, see Item 1A of this Annual Report on
Form 10-K.
Available
Information
We maintain an Internet Web site at www.westerndigital.com. Our
Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to reports filed or furnished pursuant to
Sections 13(a) and 15(d) of the Securities Exchange Act of
1934, as amended, are available on our Web site at
www.westerndigital.com, free of charge, as soon as reasonably
practicable after the electronic filing of these reports with,
or furnishing of these reports to, the SEC. Any materials we
file with the SEC are available at the SECs Public
Reference Room at 100 F Street, NE, Washington, DC
20549. Additional information about the operation of the Public
Reference Room can also be obtained by calling the SEC at
1-800-SEC-0330.
In addition, the SEC maintains a Web site at www.sec.gov that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC, including us.
Executive
Officers of the Registrant
Listed below are all of our executive officers as of
July 2, 2010, followed by a brief account of their business
experience during the past five years. Executive officers are
normally appointed annually by the Board of Directors at a
meeting of the directors immediately following the Annual
Meeting of Stockholders. There are no family relationships among
these officers nor any arrangements or understandings between
any officer and any other person pursuant to which an officer
was selected.
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Name
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Age
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Position
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John F. Coyne
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60
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President and Chief Executive Officer
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Timothy M. Leyden
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58
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Executive Vice President and Chief Financial Officer
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Martin W. Finkbeiner
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51
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Executive Vice President, Operations
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Raymond M. Bukaty
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52
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Senior Vice President, Administration, General Counsel and
Secretary
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Mr. Coyne, 60, has been a director since October 2006. He
joined us in 1983 and has served in various executive
capacities. From November 2002 until June 2005, Mr. Coyne
served as Senior Vice President, Worldwide Operations, from June
2005 until September 2005, he served as Executive Vice
President, Worldwide Operations and from November 2005 until
June 2006, he served as Executive Vice President and Chief
Operations Officer. Effective June 2006, he was named President
and Chief Operating Officer. In January 2007, he became
President and Chief Executive Officer. Mr. Coyne is a
director of Jacobs Engineering Group Inc.
Mr. Leyden, 58, re-joined us in May 2007 as Executive Vice
President, Finance, and was promoted to Executive Vice President
and Chief Financial Officer in September 2007. From December
2001 to May 2007, Mr. Leyden served in senior finance
capacities at Sage Software Inc. and Sage Software of
California, subsidiaries of Sage Group PLC, a U.K. public
company that supplies accounting and business management
software to small and medium-sized businesses, including as Vice
President, Finance and Chief Financial Officer from December
2001 to May 2004 and as Senior Vice President, Finance and Chief
Financial Officer from May 2004 to May 2007. Mr. Leyden
previously served in various worldwide finance, manufacturing
and information technology capacities with us from 1983 to
December 2000.
Mr. Finkbeiner, 51, joined us in 1992 and has served in
various positions in program management, operations,
engineering, and customer satisfaction. From October 2005
through November 2009, Mr. Finkbeiner served as Senior Vice
President, Hard Drive Development. In November 2009 he was
appointed to the position of Executive Vice President,
Operations.
Mr. Bukaty, 52, joined us in 1999 as Vice President,
Corporate Law. He was appointed to Vice President, General
Counsel and Secretary in March 2002, and to Senior Vice
President in January 2004, and assumed his current position as
Senior Vice President, Administration, General Counsel and
Secretary in October 2004. In July 2010, Mr. Bukaty
announced his intention to retire from the Company, effective
October 1, 2010.
Negative
or uncertain global economic conditions could result in a
decrease in our sales and revenue and an increase in our
operating costs, which could adversely affect our business and
operating results.
Negative or uncertain global economic conditions could cause
many of our direct and indirect customers to delay or reduce
their purchases of our products and systems containing our
products. In addition, many of our customers in each of the OEM,
distribution and retail channels rely on credit financing in
order to purchase our products. If negative conditions in the
global credit markets prevent our customers access to
credit, product orders in these channels may decrease, which
could result in lower revenue. Likewise, if our suppliers face
challenges in obtaining credit, in selling their products or
otherwise in operating their businesses, they may be unable to
offer the materials we use to manufacture our products. These
actions could result in reductions in our revenue, increased
price competition and increased operating costs, which could
adversely affect our business, results of operations and
financial condition.
If
industry demand slows significantly as a result of negative or
uncertain global economic conditions or otherwise, we may have
to take steps to align our cost structure with demand, which
could result in impairment charges and have a negative impact on
our operating results.
If demand slows significantly as a result of a deterioration in
economic conditions or otherwise, we may need to execute
restructuring activities to realign our cost structure with
softening demand. The occurrence of restructuring activities
could result in impairment charges and other expenses, which
could adversely impact our results of operations or financial
condition.
Negative
or uncertain global economic conditions increase the risk that
we could suffer unrecoverable losses on our customers
accounts receivable, which would adversely affect our financial
results.
We extend credit and payment terms to some of our customers. In
addition to ongoing credit evaluations of our customers
financial condition, we traditionally seek to mitigate our
credit risk by purchasing credit insurance on certain of our
accounts receivable balances; however, as a result of the recent
uncertainty and volatility in global economic conditions, we may
find it increasingly difficult to be able to insure these
accounts receivable. We could suffer significant losses if a
customer whose accounts receivable we have not insured, or have
underinsured, fails and is unable to pay us.
17
Additionally, negative or uncertain global economic conditions
increase the risk that if a customer whose accounts receivable
we have insured fails, the financial condition of the insurance
carrier for such customer account may have also deteriorated
such that it cannot cover our loss. A significant loss of an
accounts receivable that we cannot recover through credit
insurance would have a negative impact on our financial results.
If our
long-lived assets or goodwill become impaired, it may adversely
affect our operating results.
Negative or uncertain global economic conditions could result in
circumstances, such as a sustained decline in our stock price
and market capitalization or a decrease in our forecasted cash
flows such that they are insufficient, indicating that the
carrying value of our long-lived assets or goodwill may be
impaired. If we are required to record a significant charge to
earnings in our consolidated financial statements because an
impairment of our long-lived assets or goodwill is determined,
our results of operations will be adversely affected.
Declines
in average selling prices (ASPs) in the hard drive
industry could adversely affect our operating results.
Historically, the hard drive industry has experienced declining
ASPs. Our ASPs tend to decline when competitors lower prices as
a result of decreased costs or to absorb excess capacity,
liquidate excess inventories, restructure or attempt to gain
market share. Our ASPs also decline when there is a shift in the
mix of product sales, and sales of lower priced products
increase relative to those of higher priced products. When ASPs
in the hard drive industry decline, our ASPs are also likely to
decline, which adversely affects our operating results.
If we
fail to anticipate or timely respond to changes in the markets
for hard drives, our operating results could be adversely
affected.
The PC industry, which comprises a substantial portion of our
revenue, is experiencing a shift in demand from 3.5-inch to
2.5-inch form factor disk drives. As a result, the market for
2.5-inch form factor drives is becoming increasingly dominated
by large brand OEM customers. These OEM customers may be able to
command increased leverage in negotiating prices and other terms
of sale. If we are not successful in responding to these changes
in the market for smaller form factor drives, our business may
suffer.
In addition, during past economic downturns, as well as over the
past few years, the consumer market for computers has shifted
significantly towards lower priced systems, and we therefore
expect this trend to continue in light of current global
economic conditions. If we are not able to continue to offer a
competitively priced hard drive for the low-cost PC market, our
share of that market will likely fall, which could harm our
operating results.
The market for hard drives is also fragmenting into a variety of
devices and products. Many industry analysts expect, as do we,
that as content increasingly converts to digital technology from
the older analog technology, the technology of computers and
consumer electronics will continue to converge, and hard drives
may be found in many products other than computers, such as
various CE devices. However, there has also been a recent rapid
growth in CE devices that do not contain a hard drive (such as
tablet computers and smartphones). If device-makers are
successful in achieving customer acceptance of these devices as
a replacement for traditional computing applications that
contain hard drives, or if we are not successful in adapting our
product offerings to include alternative storage solutions that
address these devices, then demand for our products may
decrease, which could adversely affect our operating results.
Moreover, some devices such as personal video recorders and
digital video recorders, or some new PC operating systems which
allow greater consumer choice in levels of functionality and
therefore greater market differentiation, may require attributes
not currently offered in our products, resulting in a need to
develop new interfaces, form factors, technical specifications
or product features, increasing our overall operational expense
without corresponding incremental revenue at this stage. If we
are not successful in continuing to deploy our hard drive
technology and expertise to develop new products for emerging
markets such as the CE market, or if we are required to incur
significant costs in developing such products, it may harm our
operating results.
Our
prices and margins are subject to declines due to unpredictable
end-user demand and oversupply of hard drives.
Demand for our hard drives depends on the demand for systems
manufactured by our customers and on storage upgrades to
existing systems. The demand for systems has been volatile in
the past and often has had an exaggerated effect
18
on the demand for hard drives in any given period. As a result,
the hard drive market has experienced periods of excess capacity
which can lead to liquidation of excess inventories and intense
price competition. If intense price competition occurs, we may
be forced to lower prices sooner and more than expected, which
could result in lower revenue and gross margins.
Our
failure to accurately forecast market and customer demand for
our products could adversely affect our business and financial
results or operating efficiencies.
The data storage industry faces difficulties in accurately
forecasting market and customer demand for its products.
Accurately forecasting demand has become increasingly difficult
for us, our customers and our suppliers in light of the
volatility in global economic conditions. The variety and volume
of products we manufacture is based in part on these forecasts.
If our forecasts exceed actual market demand, or if market
demand decreases significantly from our forecasts, then we could
experience periods of product oversupply and price decreases,
which could impact our financial performance. If our forecasts
do not meet actual market demand, or if market demand increases
significantly beyond our forecasts or beyond our ability to add
manufacturing capacity, then we may not be able to satisfy
customer product needs, which could result in a loss of market
share if our competitors are able to meet customer demands.
Although we receive forecasts from our customers, they are not
generally obligated to purchase the forecasted amounts. Sales
volumes in the distribution and retail channels are volatile and
harder to predict than sales to our OEM or ODM customers. We
consider these forecasts in determining our component needs and
our inventory requirements. If we fail to accurately forecast
our customers product demands, we may have inadequate or
excess inventory of our products or components, which could
adversely affect our operating results.
In order to efficiently and timely meet the demands of many of
our OEM customers, we position our products in multiple
strategic locations based on the amounts forecasted by such
customers. If an OEM customers actual product demands
decrease significantly from its forecast, then we may incur
additional costs in relocating the products that have not been
purchased by the OEM. This could result in a delay in our
product sales and an increase in our operating costs, which may
negatively impact our operating results.
Our entry
into additional storage markets increases the complexity of our
business, and if we are unable to successfully adapt our
business processes as required by these new markets, we will be
at a competitive disadvantage and our ability to grow will be
adversely affected.
As we expand our product line to sell into additional storage
markets, the overall complexity of our business increases at an
accelerated rate and we must make necessary adaptations to our
business model to address these complexities. For example, as we
have previously disclosed, we entered the traditional enterprise
market in November 2009. In addition to requiring significant
capital expenditures, our entry into the traditional enterprise
market adds complexity to our business that requires us to
effectively adapt our business and management processes to
address the unique challenges and different requirements of the
traditional enterprise market, while maintaining a competitive
operating cost model. If we fail to gain market acceptance in
the traditional enterprise storage market, we will remain at a
competitive disadvantage to the companies that succeed in this
market and our ability to continue our growth will be negatively
affected.
Our
customers demand for storage capacity may not continue to
grow at current industry estimates, which may lower the prices
our customers are willing to pay for new products or put us at a
disadvantage to competing technologies.
Our customers demand for storage capacity may not continue
to grow at current industry estimates as a result of
developments in the regulation and enforcement of digital rights
management, the emergence of processes such as cloud computing,
data deduplication and storage virtualization, or otherwise.
These factors could lead to our customers storage capacity
needs being satisfied at lower prices with lower capacity hard
drives or solid-state storage products that we do not offer,
thereby decreasing our revenue or putting us at a disadvantage
to competing storage technologies. As a result, even with
increasing aggregate demand for storage capacity, our ASPs could
decline, which could adversely affect our operating results.
19
Expansion
into new hard drive markets may cause our capital expenditures
to increase, and if we do not successfully expand into new
markets, our business may suffer.
To remain a significant supplier of hard drives, we will need to
offer a broad range of hard drive products to our customers. We
currently offer a variety of 3.5-inch or 2.5-inch hard drives
for the desktop, mobile, enterprise, CE and external storage
markets. However, demand for hard drives may shift to products
in form factors or with interfaces that our competitors offer
but which we do not. Expansion into other hard drive markets and
resulting increases in manufacturing capacity requirements may
require us to make substantial additional investments in part
because our operations are largely vertically integrated now
that we manufacture heads and magnetic media for use in many of
the hard drives we manufacture. If we fail to successfully
expand into new hard drive markets with products that we do not
currently offer, we may lose business to our competitors who
offer these products.
If we
fail to successfully manage our new product development or new
market expansion, or if we fail to anticipate the issues
associated with such development or expansion, our business may
suffer.
While we continue to develop new products and look to expand
into new markets, the success of our new product introductions
depends on a number of factors, including our ability to
anticipate and manage a variety of issues associated with these
new products and new markets, such as:
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difficulties faced in manufacturing ramp;
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market acceptance;
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effective management of inventory levels in line with
anticipated product demand; and
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quality problems or other defects in the early stages of new
product introduction that were not anticipated in the design of
those products.
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Further, we need to identify how any of the new markets into
which we are expanding may have different characteristics from
the markets in which we currently exist and properly address
these differences. These characteristics may include:
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demand volume requirements;
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demand seasonality;
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product generation development rates;
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customer concentrations;
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warranty expectations and product return policies; and
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cost, performance and compatibility requirements.
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Our business may suffer if we fail to successfully anticipate
and manage these issues associated with our product development
and market expansion. For example, our branded products are
designed to attach to and interoperate with a wide variety of PC
and CE devices, and therefore their functionality relies on the
manufacturer of such devices, or the associated operating
systems, enabling the manufacturers devices to operate
with our branded products. If our branded products are not
compatible with a wide variety of devices, or if device
manufacturers design their devices so that our branded products
cannot operate with them, and we cannot quickly and efficiently
adapt our branded products to address these compatibility
issues, our business could suffer.
Expanding
into new markets exposes our business to different seasonal
demand cycles, which in turn could adversely affect our
operating results.
The CE and retail markets have different seasonal pricing and
volume demand cycles as compared to the PC market. By expanding
into these markets, we became exposed to seasonal fluctuations
that are different from, and in addition to, those of the PC
market. For example, because the primary customer for our
branded products are individual consumers, this market has
historically experienced a dramatic increase in demand during
the winter holiday season. If we do not
20
properly adjust our supply to these new demand cycles, we risk
having excess inventory during periods of low demand and
insufficient inventory during periods of high demand, which
could adversely affect our operating results.
Selling
to the retail market is an important part of our business, and
if consumer spending decreases, or if we fail to maintain and
grow our market share or gain market acceptance of our branded
products, our operating results could suffer.
Selling branded products is an important part of our business,
and as our branded products revenue increases as a portion of
our overall revenue, our success in the retail market becomes
increasingly important to our operating results. If consumer
spending decreases as a result of the recent uncertainty and
volatility in global economic conditions, our operating results
could suffer because of the increased importance of our branded
products business.
We sell our branded products directly to a select group of major
retailers, such as computer superstores and CE stores, and
authorize sales through distributors to other retailers and
online resellers. Our current retail customer base is primarily
in the U.S., Canada and Europe. We are facing increased
competition from other companies for shelf space at a small
number of major retailers that have strong buying power and
pricing leverage. If we are unable to maintain effective working
relationships with major retailers and online resellers, or if
we fail to successfully expand into multiple channels, our
competitive position in the branded product market may suffer
and our operating results may be adversely affected.
Our success in the retail market also depends on our ability to
maintain our brand image and corporate reputation. Adverse
publicity, whether or not justified, or allegations of product
quality issues, even if false or unfounded, could tarnish our
reputation and cause our customers to choose products offered by
our competitors. In addition, the proliferation of new methods
of mass communication facilitated by the Internet makes it
easier for false or unfounded allegations to adversely affect
our brand image and reputation. If customers no longer maintain
a preference for
WD®-brand
products, our operating results may be adversely affected.
Additionally, we face strong competition in maintaining and
trying to grow our market share in the retail market,
particularly because of the relatively low barriers to entry in
this market. For example, several additional hard drive
manufacturers have recently disclosed plans to expand into the
external storage market. As these companies attempt to gain
market share, we may have difficulty in maintaining or growing
our market share and there may be increased downward pressure on
pricing. There can be no assurance that any new products we
introduce into the retail market will gain market acceptance,
and if they do not, our operating results could suffer.
Loss of
market share with or by a key customer, or consolidation among
our customer base, could harm our operating results.
During the year ended July 2, 2010, a large percentage of
our revenue, 53%, came from sales to our top 10 customers. These
customers have a variety of suppliers to choose from and
therefore can make substantial demands on us, including demands
on product pricing and on contractual terms, which often results
in the allocation of risk to us as the supplier. Even if we
successfully qualify a product with a customer, the customer is
not generally obligated to purchase any minimum volume of
products from us and may be able to cancel an order or terminate
its relationship with us at any time. Our ability to maintain
strong relationships with our principal customers is essential
to our future performance. If we lose a key customer, if any of
our key customers reduce their orders of our products or require
us to reduce our prices before we are able to reduce costs, if a
customer is acquired by one of our competitors or if a key
customer suffers financial hardship, our operating results would
likely be harmed.
Additionally, if there is consolidation among our customer base,
our customers may be able to command increased leverage in
negotiating prices and other terms of sale, which could
adversely affect our profitability. In addition, if, as a result
of increased leverage, customer pressures require us to reduce
our pricing such that our gross margins are diminished, we could
decide not to sell our products to a particular customer, which
could result in a decrease in our revenue. Consolidation among
our customer base may also lead to reduced demand for our
products, replacement of our products by the combined entity
with those of our competitors and cancellations of orders, each
of which could harm our operating results.
21
Current
or future competitors may gain a technology advantage or develop
an advantageous cost structure that we cannot match.
It may be possible for our current or future competitors to gain
an advantage in product technology, manufacturing technology, or
process technology, which may allow them to offer products or
services that have a significant advantage over the products and
services that we offer. Advantages could be in capacity,
performance, reliability, serviceability, or other attributes.
We may be at a competitive disadvantage to any companies that
are able to gain these advantages.
Further
industry consolidation could provide competitive advantages to
our competitors.
The hard drive industry has experienced consolidation over the
past several years. Consolidation by our competitors may enhance
their capacity, abilities and resources and lower their cost
structure, causing us to be at a competitive disadvantage.
Additionally, continued industry consolidation may lead to
uncertainty in areas such as component availability, which could
negatively impact our cost structure.
Sales in
the distribution channel are important to our business, and if
we fail to maintain brand preference with our distributors or if
distribution markets for hard drives weaken, our operating
results could suffer.
Our distribution customers typically sell to small computer
manufacturers, dealers, systems integrators and other resellers.
We face significant competition in this channel as a result of
limited product qualification programs and a significant focus
on price and availability of product. If we fail to remain
competitive in terms of our technology, quality, service and
support, our distribution customers may favor our competitors,
and our operating results could suffer. Additionally, if the
distribution market weakens as a result of a slowing PC growth
rate, technology transitions or a significant change in consumer
buying preference, or if we experience significant price
declines due to oversupply in the distribution channel, then our
operating results would be adversely affected.
The hard
drive industry is highly competitive and can be characterized by
significant shifts in market share among the major
competitors.
The price of hard drives has fallen over time due to increases
in supply, cost reductions, technological advances and price
reductions by competitors seeking to liquidate excess
inventories or attempting to gain market share. In addition,
rapid technological changes often reduce the volume and
profitability of sales of existing products and increase the
risk of inventory obsolescence. These factors, taken together,
may result in significant shifts in market share among the
industrys major participants. In addition, product recalls
can lead to a loss of market share, which could adversely affect
our operating results.
Some of
our competitors with diversified business units outside the hard
drive industry may over extended periods of time sell hard
drives at prices that we cannot profitably match.
Some of our competitors earn a significant portion of their
revenue from business units outside the hard drive industry.
Because they do not depend solely on sales of hard drives to
achieve profitability, they may sell hard drives at lower prices
and operate their hard drive business unit at a loss over an
extended period of time while still remaining profitable
overall. In addition, if these competitors can increase sales of
non-hard drive products to the same customers, they may benefit
from selling their hard drives at lower prices. Our operating
results may be adversely affected if we cannot successfully
compete with the pricing by these companies.
If we
fail to qualify our products with our customers or if product
life cycles lengthen, it may have a significant adverse impact
on our sales and margins.
We regularly engage in new product qualification with our
customers. Once a product is accepted for qualification testing,
failures or delays in the qualification process can result in
delayed or reduced product sales, reduced product margins caused
by having to continue to offer a more costly current generation
product, or lost sales to that customer until the next
generation of products is introduced. The effect of missing a
product qualification opportunity is magnified by the limited
number of high volume OEMs, which continue to consolidate their
share of the storage markets. Likewise, if product life cycles
lengthen, we may have a significantly longer period to wait
before we have an
22
opportunity to qualify a new product with a customer, which
could reduce our profits because we expect declining gross
margins on our current generation products as a result of
competitive pressures.
We are
subject to risks related to product defects, which could result
in product recalls or epidemic failures and could subject us to
warranty claims in excess of our warranty provisions or which
are greater than anticipated.
We warrant the majority of our products for periods of one to
five years. We test our hard drives in our manufacturing
facilities through a variety of means. However, there can be no
assurance that our testing will reveal defects in our products,
which may not become apparent until after the products have been
sold into the market. Accordingly, there is a risk that product
defects will occur, which could require a product recall.
Product recalls can be expensive to implement and, if a product
recall occurs during the products warranty period, we may
be required to replace the defective product. Moreover, there is
a risk that product defects may trigger an epidemic failure
clause in a customer agreement. If an epidemic failure occurs,
we may be required to replace or refund the value of the
defective product and to cover certain other costs associated
with the consequences of the epidemic failure. In addition, a
product recall or epidemic failure may damage our reputation or
customer relationships, and may cause us to lose market share
with our customers, including our OEM and ODM customers.
Our standard warranties contain limits on damages and exclusions
of liability for consequential damages and for misuse, improper
installation, alteration, accident or mishandling while in the
possession of someone other than us. We record an accrual for
estimated warranty costs at the time revenue is recognized. We
may incur additional operating expenses if our warranty
provision does not reflect the actual cost of resolving issues
related to defects in our products, whether as a result of a
product recall, epidemic failure or otherwise. If these
additional expenses are significant, it could adversely affect
our business, financial condition and operating results.
A
competitive cost structure is critical to our operating results,
and increased costs may adversely affect our operating
margin.
A competitive cost structure for our products, including
critical components, labor and overhead, is critical to the
success of our business, and our operating results depend on our
ability to maintain competitive cost structures on new and
established products. If our competitors are able to achieve a
lower cost structure that we are unable to match, we could be at
a competitive disadvantage to those competitors.
Shortages
of commodity materials or commodity components, price
volatility, or use by other industries of materials and
components used in the hard drive industry, may negatively
impact our operating results.
Increases in the cost for certain commodity materials or
commodity components may increase our costs of manufacturing and
transporting hard drives and key components. Shortages of
commodity components such as DRAM and NAND flash, or commodity
materials such as glass substrates, stainless steel, aluminum,
nickel, neodymium, ruthenium or platinum, may increase our costs
and may result in lower operating margins if we are unable to
find ways to mitigate these increased costs. Furthermore, if
other high volume industries increase their demand for materials
or components such as these, our costs may further increase,
which could have an adverse effect on our operating margins. In
addition, shortages in other commodity components and materials
used in our customers products could result in a decrease
in demand for our products, which would negatively impact our
operating results. The volatility in the cost of oil also
affects our transportation costs and may result in lower
operating margins if we are unable to pass these increased costs
through to our customers.
If we
fail to maintain effective relationships with our major
component suppliers, our supply of critical components may be at
risk and our profitability could suffer.
While we make most of our own heads and magnetic media for some
of our product families, we do, according to our sourcing
strategy, purchase some percentage of our required heads and
magnetic media from our external supply base. In addition, we
purchase a majority of our other components, including all
mechanical and electronic components, from our external supply
base. For certain components, we use multiple suppliers that
deploy different technology or processes, and we must
successfully integrate components from these suppliers in our
products. Accordingly, we must maintain effective relationships
with our supply base to source our component needs, develop
compatible technology, and maintain continuity of supply at
reasonable costs. If we fail to maintain effective relationships
with our supply base, or if we fail to
23
integrate components from our suppliers effectively, this may
adversely affect our ability to develop and deliver the best
products to our customers and our profitability could suffer.
For example, in August 2003, we settled litigation with a
supplier who previously was the sole source of read channel
devices for our hard drives. As a result of the disputes that
gave rise to the litigation, our profitability was at risk until
another suppliers read channel devices could be designed
into our products. Similar disputes with other strategic
component suppliers could adversely affect our operating results.
Violation
of applicable laws, including labor or environmental laws, and
certain other practices by our suppliers could harm our
business.
We expect our suppliers,
sub-suppliers
and
sub-contractors
(collectively referred to as suppliers) to operate
in compliance with applicable laws and regulations, including
labor and environmental laws, and to otherwise meet our required
supplier standards of conduct. While our internal operating
guidelines promote ethical business practices, we do not control
our suppliers or their labor or environmental practices. The
violation of labor, environmental or other laws by any of our
suppliers, or divergence of a suppliers business practices
from those generally accepted as ethical in the U.S., could harm
our business by:
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interrupting or otherwise disrupting the shipment of our product
components;
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damaging our reputation;
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forcing us to find alternate component sources;
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reducing demand for our products (for example, through a
consumer boycott); or
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exposing us to potential liability for our suppliers
wrongdoings.
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Dependence
on a limited number of qualified suppliers of components and
manufacturing equipment could lead to delays, lost revenue or
increased costs.
Our future operating results may depend substantially on our
suppliers ability to timely qualify their components in
our programs, and their ability to supply us with these
components in sufficient volumes to meet our production
requirements. A number of the components that we use are
available from only a single or limited number of qualified
suppliers, and may be used across multiple product lines. In
addition, some of the components (or component types) used in
our products are used in other devices, such as mobile
telephones and digital cameras. If there is a significant
simultaneous upswing in demand for such a component (or
component type) from several high volume industries resulting in
a supply reduction, if a component is otherwise in short supply,
or if a supplier fails to qualify or has a quality issue with a
component, we may experience delays or increased costs in
obtaining that component. If we are unable to obtain sufficient
quantities of materials used in the manufacture of magnetic
components, or other necessary components, we may experience
production delays which could cause us loss of revenue. If a
component becomes unavailable, we could suffer significant loss
of revenue.
In addition, certain equipment and consumables we use in our
manufacturing or testing processes are available only from a
limited number of suppliers. Some of this equipment and
consumables use materials that at times could be in short
supply. If these materials are not available, or are not
available in the quantities we require for our manufacturing and
testing processes, our ability to manufacture our products could
be impacted, and we could suffer significant loss of revenue.
Each of the following could also significantly harm our
operating results:
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an unwillingness of a supplier to supply such components or
equipment to us;
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consolidation of key suppliers;
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failure of a key suppliers business process;
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a key suppliers or
sub-suppliers
inability to access credit necessary to operate its
business; or
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failure of a key supplier to remain in business, to remain an
independent merchant supplier, or to adjust to market conditions.
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Contractual
commitments with component suppliers may result in us paying
increased charges and cash advances for such components or may
cause us to have inadequate or excess component
inventory.
To reduce the risk of component shortages, we attempt to provide
significant lead times when buying components, which may subject
us to cancellation charges if we cancel orders as a result of
technology transitions or changes in our component needs. In
addition, we may from time to time enter into contractual
commitments with component suppliers in an effort to increase
and stabilize the supply of those components and enable us to
purchase such components at favorable prices. Some of these
commitments may require us to buy a substantial number of
components from the supplier or make significant cash advances
to the supplier; however, these commitments may not result in a
satisfactory increase or stabilization of the supply of such
components. Furthermore, as a result of the current global
economic conditions, our ability to forecast our requirements
for these components has become increasingly difficult,
therefore increasing the risk that our contractual commitments
may not meet our actual supply requirements, which could cause
us to have inadequate or excess component inventory and
adversely affect our operating results and increase our
operating costs.
Failure
by certain suppliers to effectively and efficiently develop and
manufacture components, technology or production equipment for
our products may adversely affect our operations.
We rely on suppliers for various component parts that we
integrate into our hard drives but do not manufacture ourselves,
such as semiconductors, motors, flex circuits and suspensions.
Likewise, we rely on suppliers for certain technology and
equipment necessary for advanced development technology for
future products. Some of these components, and most of this
technology and production equipment, must be specifically
designed to be compatible for use in our products or for
developing and manufacturing our future products, and are only
available from a limited number of suppliers, some of with whom
we are sole sourced. We are therefore dependent on these
suppliers to be able and willing to dedicate adequate
engineering resources to develop components that can be
successfully integrated with our products, and technology and
production equipment that can be used to develop and manufacture
our next-generation products efficiently. The failure of these
suppliers to effectively and efficiently develop and manufacture
components that can be integrated into our products or
technology and production equipment that can be used to develop
or manufacture next generation products may cause us to
experience inability or delay in our manufacturing and shipment
of hard drive products, our expansion into new technology and
markets, or our ability to remain competitive with alternative
storage technologies, therefore adversely affecting our business
and financial results.
There are
certain additional capital expenditure costs and asset
utilization risks to our business associated with our strategy
to vertically integrate our operations.
Our vertical integration of head and magnetic media
manufacturing resulted in a fundamental change in our operating
structure, as we now manufacture heads and magnetic media for
use in many of the hard drives we manufacture. Consequently, we
make more capital investments and carry a higher percentage of
fixed costs than we would if we were not vertically integrated.
If the overall level of production decreases for any reason, and
we are unable to reduce our fixed costs to match sales, our head
or magnetic media manufacturing assets may face
under-utilization that may impact our operating results. We are
therefore subject to additional risks related to overall asset
utilization, including the need to operate at high levels of
utilization to drive competitive costs and the need for assured
supply of components that we do not manufacture ourselves.
In addition, we may incur additional risks, including:
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failure to continue to leverage the integration of our magnetic
media technology with our head technology;
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insufficient third party sources to satisfy our needs if we are
unable to manufacture a sufficient supply of heads or magnetic
media;
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third party head or magnetic media suppliers may not continue to
do business with us or may not do business with us on the same
terms and conditions we have previously enjoyed;
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claims that our manufacturing of heads or magnetic media may
infringe certain intellectual property rights of other
companies; and
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difficulties locating in a timely manner suitable manufacturing
equipment for our head or magnetic media manufacturing processes
and replacement parts for such equipment.
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If we do not adequately address the challenges related to our
head or magnetic media manufacturing operations, our ongoing
operations could be disrupted, resulting in a decrease in our
revenue or profit margins and negatively impacting our operating
results.
If we are
unable to timely and cost-effectively develop heads and magnetic
media with leading technology and overall quality, our ability
to sell our products may be significantly diminished, which
could materially and adversely affect our business and financial
results.
Under our business plan, we are developing and manufacturing a
substantial portion of the heads and magnetic media used in the
hard drive products we manufacture. Consequently, we are more
dependent upon our own development and execution efforts and
less able to take advantage of head and magnetic media
technologies developed by other manufacturers. Technology
transition for head and magnetic media designs is critical to
increasing our volume production of heads and magnetic media.
There can be no assurance, however, that we will be successful
in timely and cost-effectively developing and manufacturing
heads or magnetic media for products using future technologies.
We also may not effectively transition our head or magnetic
media design and technology to achieve acceptable manufacturing
yields using the technologies necessary to satisfy our
customers product needs, or we may encounter quality
problems with the heads or magnetic media we manufacture. In
addition, we may not have access to external sources of supply
without incurring substantial costs which would negatively
impact our business and financial results.
Changes
in product life cycles could adversely affect our financial
results.
If product life cycles lengthen, we may need to develop new
technologies or programs to reduce our costs on any particular
product to maintain competitive pricing for that product. If
product life cycles shorten, it may result in an increase in our
overall expenses and a decrease in our gross margins, both of
which could adversely affect our operating results. In addition,
shortening of product life cycles also makes it more difficult
to recover the cost of product development before the product
becomes obsolete. Our failure to recover the cost of product
development in the future could adversely affect our operating
results.
If we
fail to make the technical innovations necessary to continue to
increase areal density, we may fail to remain
competitive.
New products in the hard drive market typically require higher
areal densities than previous product generations, posing
formidable technical and manufacturing challenges. Higher areal
densities require existing head and magnetic media technology to
be improved or new technologies developed to accommodate more
data on a single disk. In addition, our introduction of new
products during a technology transition increases the likelihood
of unexpected quality concerns. Our failure to bring high
quality new products to market on time and at acceptable costs
may put us at a competitive disadvantage to companies that
achieve these results.
We make
significant investments in research and development, and
unsuccessful investments could materially adversely affect our
business, financial condition and results of
operations.
Over the past several years, our business strategy has been to
derive a competitive advantage by moving from being a follower
of new technologies to being a leader in the innovation and
development of new technologies. This strategy requires us to
make significant investments in research and development. There
can be no assurance that these investments will result in viable
technologies or products, or if these investments do result in
viable technologies or products, that they will be profitable or
accepted by the market. Significant investments in unsuccessful
research and development efforts could materially adversely
affect our business, financial condition and results of
operations.
A
fundamental change in recording technology could result in
significant increases in our operating expenses and could put us
at a competitive disadvantage.
Historically, when the industry experiences a fundamental change
in technology, any manufacturer that fails to successfully and
timely adjust its designs and processes to accommodate the new
technology fails to remain competitive. There are some
technologies, such as current-perpendicular-to-plane giant
magnetoresistance, shingle magnetic
26
recording, energy assisted magnetic recording, patterned
magnetic media, advanced signal processing, advanced format
technology and other similar potentially breakthrough
technologies, that will represent revolutionary recording
technologies if they can be implemented by a competitor on a
commercially viable basis ahead of the industry, which could put
us at a competitive disadvantage. As a result of these
technology shifts, we could incur substantial costs in
developing new technologies, such as heads, magnetic media, and
tools to remain competitive. If we fail to successfully
implement these new technologies, or if we are significantly
slower than our competitors at implementing new technologies, we
may not be able to offer products with capacities that our
customers desire. For example, new recording technology requires
changes in the manufacturing process of heads and magnetic
media, which may cause longer production times and reduce the
overall availability of magnetic media in the industry.
Additionally, the new technology requires a greater degree of
integration between heads and magnetic media which may lengthen
our time of development of hard drives using this technology.
Furthermore, as we attempt to develop and implement new
technologies, we may become more dependent on suppliers to
ensure our access to components, technology and production
equipment that accommodate the new technology. For example,
advanced wafer and magnetic media manufacturing technologies
have historically been developed for use in the semiconductor
industry prior to the hard drive industry. However, successful
implementation of the use of patterned magnetic media with hard
drive magnetic media currently presents a significant technical
challenge facing the hard drive industry but not the
semiconductor industry. Therefore, our suppliers may not be
willing to dedicate adequate engineering resources to develop
manufacturing equipment for patterned magnetic media prior to a
need for the equipment in the semiconductor industry. We believe
that if new technologies, such as energy assisted magnetic
recording, are not successfully implemented in the hard drive
industry, then alternative storage technologies like solid-state
storage may more rapidly overtake hard drives as the preferred
storage solution for higher capacity storage needs. This result
would put us at a competitive disadvantage and negatively impact
our operating results.
The
difficulty of introducing hard drives with higher levels of
areal density and the challenges of reducing other costs may
impact our ability to achieve historical levels of cost
reduction.
Storage capacity of the hard drive, as manufactured by us, is
determined by the number of disks and each disks areal
density. Areal density is a measure of the amount of magnetic
bits that can be stored on the recording surface of the disk.
Generally, the higher the areal density, the more information
can be stored on a single platter. Historically, we have been
able to achieve a large percentage of cost reduction through
increases in areal density. Increases in areal density mean that
the average drive we sell has fewer heads and disks for the same
capacity and, therefore, may result in a lower component cost.
However, because increasing areal density has become more
difficult in the hard drive industry, such increases may require
increases in component costs, and other opportunities to reduce
costs may not continue at historical rates. Additionally,
increases in areal density may require us to make further
capital expenditures on items such as new testing equipment
needed as a result of an increased number of GB per platter. Our
inability to achieve cost reductions could adversely affect our
operating results.
If we do
not properly manage the technology transitions of our products,
our competitiveness and operating results may be negatively
affected.
The storage markets in which we offer our products continuously
undergo technology transitions which we must anticipate and
adapt our products to address in a timely manner. For example,
serial interfaces normally go through cycles in which their
maximum speeds double. We must effectively manage the transition
of the features of our products to address these faster
interface speeds in a timely manner in order to remain
competitive and cost effective. If we fail to successfully and
timely manage the transition to faster interface speeds, we may
be at a competitive disadvantage to other companies that have
successfully adapted their products in a timely manner and our
operating results may suffer.
If we
fail to develop and introduce new hard drives that are
competitive against alternative storage technologies, our
business may suffer.
Our success depends in part on our ability to develop and
introduce new products in a timely manner in order to keep pace
with competing technologies. Alternative storage technologies
like solid-state storage and flash memory technology have
successfully served digital entertainment markets for products
such as digital cameras, MP3 players, USB flash drives and
mobile phones that require a relatively low amount of storage
capacity that cannot be economically
27
serviced using hard drive technology. Typically, storage needs
for higher capacity and performance, with lower
cost-per-gigabyte,
have been better served by hard drives. However, advances in
semiconductor technology have resulted in solid-state storage
emerging as a technology that is competitive with hard drives
for niche high performance needs in advanced digital computing
markets such as enterprise servers and storage, in spite of the
associated challenges in the attributes of cost, capacity and
reliability. Solid-state storage, which incorporates
semiconductor media, is produced by large semiconductor
companies who can then sell their storage products at lower
prices while still remaining profitable overall. This can help
them improve their market share at the expense of the
competition. In addition, these semiconductor companies may
choose to supply companies like us with semiconductor media at
prices that make it difficult, if not impossible, for us to
compete with them on a profitable basis. As a result, there can
be no assurance that we will be successful in anticipating and
developing new products for the desktop, mobile, enterprise, CE
and external storage markets in response to solid-state storage,
as well as other competing technologies. If our hard drive
technology fails to offer higher capacity, performance and
reliability with lower
cost-per-gigabyte
than solid-state storage for the desktop, mobile, enterprise, CE
and external storage markets, we will be at a competitive
disadvantage to companies using semiconductor technology to
serve these markets and our business will suffer.
Spending
to improve our technology and develop new technology to remain
competitive may negatively impact our financial
results.
In attempting to remain competitive, we may need to increase our
capital expenditures and expenses above our historical run-rate
model in order to attempt to improve our existing technology and
develop new technology. Increased investments in technology
could cause our cost structure to fall out of alignment with
demand for our products which would have a negative impact on
our financial results.
Our
manufacturing operations are concentrated in a small number of
large, purpose-built facilities, which subjects us to
substantial risk of damage or loss if operations at any of these
facilities are disrupted.
As a result of our cost structure and strategy of vertical
integration, we conduct our manufacturing operations at large,
high volume, purpose-built facilities. For example,
approximately 80% of our requirement for heads is satisfied by
wafers fabricated in our Fremont, California facility. Also, we
manufacture the majority of our substrates for magnetic media in
our Johor, Malaysia facility, and we finish a majority of our
magnetic media in our facilities in Penang, Malaysia and Tuas,
Singapore. A majority of our high volume hard drive
manufacturing operations are conducted in two facilities in
Thailand, with the balance conducted in our Kuala Lumpur,
Malaysia facility. The manufacturing facilities of many of our
suppliers are also in Asia near our facilities. A fire, flood,
earthquake, tsunami or other disaster, condition or event such
as political instability, civil unrest or a power outage that
adversely affects any of these facilities would significantly
affect our ability to manufacture hard drives, which would
result in a substantial loss of sales and revenue and a
substantial harm to our operating results. Similarly, a
localized health risk affecting our employees at these
facilities or the staff of our suppliers, such as the spread of
the Influenza A (H1N1) or a new pandemic influenza, could impair
the total volume of hard drives that we are able to manufacture,
which would result in substantial harm to our operating results.
Our
operating results will be adversely affected if we fail to
optimize the overall quality,
time-to-market
and
time-to-volume
of new and established products.
To achieve consistent success with our customers, we must
balance several key attributes such as
time-to-market,
time-to-volume,
quality, cost, service, price and a broad product portfolio. Our
operating results will be adversely affected if we fail to:
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maintain overall quality of products in new and established
programs;
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produce sufficient quantities of products at the capacities our
customers demand while managing the integration of new and
established technologies;
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develop and qualify new products that have changes in overall
specifications or features that our customers may require for
their business needs;
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obtain commitments from our customers to qualify new products,
redesigns of current products, or new components in our existing
products;
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obtain customer qualification of these products on a timely
basis by meeting all of our customers needs for
performance, quality and features;
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maintain an adequate supply of components required to
manufacture our products; or
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maintain the manufacturing capability to quickly change our
product mix between different capacities, form factors and spin
speeds in response to changes in customers product demands.
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Manufacturing
outside the U.S. and marketing our products globally subjects us
to numerous risks.
We are subject to risks associated with our global manufacturing
operations and global marketing efforts, including:
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obtaining requisite U.S. and foreign governmental permits
and approvals;
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currency exchange rate fluctuations or restrictions;
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political instability and civil unrest;
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limited transportation availability, delays, and extended time
required for shipping, which risks may be compounded in periods
of price declines;
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higher freight rates;
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labor problems;
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trade restrictions or higher tariffs;
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copyright levies or similar fees or taxes imposed in European
and other countries;
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exchange, currency and tax controls and reallocations;
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increasing labor and overhead costs; and
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loss or non-renewal of favorable tax treatment under agreements
or treaties with foreign tax authorities.
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Terrorist
attacks may adversely affect our business and operating
results.
The continued threat of terrorist activity and other acts of war
or hostility have created uncertainty in the financial and
insurance markets and have significantly increased the
political, economic and social instability in some of the
geographic areas in which we operate. Additionally, it is
uncertain what impact the reactions to such acts by various
governmental agencies and security regulators worldwide will
have on shipping costs. Acts of terrorism, either domestically
or abroad, could create further uncertainties and instability.
To the extent this results in disruption or delays of our
manufacturing capabilities or shipments of our products, our
business, operating results and financial condition could be
adversely affected.
Sudden
disruptions to the availability of freight lanes could have an
impact on our operations.
We generally ship our products to our customers, and receive
shipments from our suppliers, via air or ocean freight. The
sudden unavailability or disruption of cargo operations or
freight lanes, such as due to labor difficulties or disputes,
severe weather patterns or other natural disasters, or political
instability or civil unrest, could impact our operating results
by impairing our ability to timely and efficiently deliver our
products.
We are
vulnerable to system failures or attacks, which could harm our
business.
We are heavily dependent on our technology infrastructure, among
other functions, to operate our factories, sell our products,
fulfill orders, manage inventory and bill, collect and make
payments. Our systems are vulnerable to damage or interruption
from natural disasters, power loss, telecommunication failures,
computer viruses, computer
denial-of-service
attacks and other events. Our business is also subject to
break-ins, sabotage and intentional acts of vandalism by third
parties as well as employees. Despite any precautions we may
take, such problems could result in, among other consequences,
interruptions in our business, which could harm our reputation
and financial condition.
29
If we
fail to identify, manage, complete and integrate acquisitions,
investment opportunities or other significant transactions, it
may adversely affect our future results.
As part of our growth strategy, we may pursue acquisitions of,
investment opportunities in or other significant transactions
with companies that are complementary to our business. In order
to pursue this strategy successfully, we must identify
attractive acquisition or investment opportunities, successfully
complete the transaction, some of which may be large and
complex, and manage post-closing issues such as integration of
the acquired company or employees. We may not be able to
identify or complete appealing acquisition or investment
opportunities given the intense competition for these
transactions. Even if we identify and complete suitable
corporate transactions, we may not be able to successfully
address any integration challenges in a timely manner, or at
all. If we fail to successfully integrate an acquisition, we may
not realize all or any of the anticipated benefits of the
acquisition, and our future results of operations could be
adversely affected.
If we are
unable to retain or hire key staff and skilled employees our
business results may suffer.
Our success depends upon the continued contributions of our key
staff and skilled employees, many of whom would be extremely
difficult to replace. Global competition for skilled employees
in the data storage industry is intense and, as we attempt to
move to a position of technology leadership in the storage
industry, our business success becomes increasingly dependent on
our ability to retain our key staff and skilled employees as
well as attract, integrate and retain new skilled employees.
Volatility or lack of positive performance in our stock price
and the overall markets may adversely affect our ability to
retain key staff or skilled employees who have received equity
compensation. Additionally, because a substantial portion of our
key employees compensation is placed at risk
and linked to the performance of our business, when our
operating results are negatively impacted by global economic
conditions, we are at a competitive disadvantage for retaining
and hiring key staff and skilled employees versus other
companies that pay a relatively higher fixed salary. If we are
unable to retain our existing key staff or skilled employees, or
hire and integrate new key staff or skilled employees, or if we
fail to implement succession plans for our key staff, our
operating results would likely be harmed.
The
nature of our business and our reliance on intellectual property
and other proprietary information subjects us to the risk of
significant litigation.
The data storage industry has been characterized by significant
litigation. This includes litigation relating to patent and
other intellectual property rights, product liability claims and
other types of litigation. Litigation can be expensive, lengthy
and disruptive to normal business operations. Moreover, the
results of litigation are inherently uncertain and may result in
adverse rulings or decisions. We may enter into settlements or
be subject to judgments that may, individually or in the
aggregate, have a material adverse effect on our business,
financial condition or operating results.
We evaluate notices of alleged patent infringement and notices
of patents from patent holders that we receive from time to
time. If claims or actions are asserted against us, we may be
required to obtain a license or cross-license, modify our
existing technology or design a new non-infringing technology.
Such licenses or design modifications can be extremely costly.
In addition, we may decide to settle a claim or action against
us, which settlement could be costly. We may also be liable for
any past infringement. If there is an adverse ruling against us
in an infringement lawsuit, an injunction could be issued
barring production or sale of any infringing product. It could
also result in a damage award equal to a reasonable royalty or
lost profits or, if there is a finding of willful infringement,
treble damages. Any of these results would increase our costs
and harm our operating results.
Our
reliance on intellectual property and other proprietary
information subjects us to the risk that these key ingredients
of our business could be copied by competitors.
Our success depends, in significant part, on the proprietary
nature of our technology, including non-patentable intellectual
property such as our process technology. If a competitor is able
to reproduce or otherwise capitalize on our technology despite
the safeguards we have in place, it may be difficult, expensive
or impossible for us to obtain necessary legal protection. Also,
the laws of some foreign countries may not protect our
intellectual property to the same extent as do U.S. laws.
In addition to patent protection of intellectual property
rights, we consider elements of our product designs and
processes to be proprietary and confidential. We rely upon
employee, consultant and vendor non-disclosure agreements and
contractual provisions and a system of internal safeguards to
protect our proprietary information.
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However, any of our registered or unregistered intellectual
property rights may be challenged or exploited by others in the
industry, which might harm our operating results.
The costs
of compliance with state, federal and international legal and
regulatory requirements, such as environmental, labor, trade and
tax regulations, and customers standards of corporate
citizenship could cause an increase in our operating
costs.
We may be or become subject to various state, federal and
international laws and regulations governing our environmental,
labor, trade and tax practices. These laws and regulations,
particularly those applicable to our international operations,
are or may be complex, extensive and subject to change. We will
need to ensure that we and our component suppliers timely comply
with such laws and regulations, which may result in an increase
in our operating costs. For example, the European Union
(EU) has enacted the Restriction of the Use of
Certain Hazardous Substances in Electrical and Electronic
Equipment (RoHS) directive, which prohibits the use
of certain substances in electronic equipment, and the Waste
Electrical and Electronic Equipment (WEEE)
directive, which obligates parties that place electrical and
electronic equipment onto the market in the EU to put a clearly
identifiable mark on the equipment, register with and report to
EU member countries regarding distribution of the equipment, and
provide a mechanism to take back and properly dispose of the
equipment. Similar legislation may be enacted in other locations
where we manufacture or sell our products. In addition, climate
change legislation in the U.S. is a significant topic of
discussion and may generate federal or other regulatory
responses in the near future. If we or our component suppliers
fail to timely comply with applicable legislation, our customers
may refuse to purchase our products or we may face increased
operating costs as a result of taxes, fines or penalties, which
would have a materially adverse effect on our business,
financial condition and operating results.
In connection with our compliance with such environmental laws
and regulations, as well as our compliance with industry
environmental initiatives, the standards of business conduct
required by some of our customers, and our commitment to sound
corporate citizenship in all aspects of our business, we could
incur substantial compliance and operating costs and be subject
to disruptions to our operations and logistics. In addition, if
we were found to be in violation of these laws or noncompliant
with these initiatives or standards of conduct, we could be
subject to governmental fines, liability to our customers and
damage to our reputation and corporate brand which could cause
our financial condition or operating results to suffer.
Fluctuations
in currency exchange rates as a result of our international
operations may negatively affect our operating
results.
Because we manufacture and sell our products abroad, our
revenue, margins, operating costs and cash flows are impacted by
fluctuations in foreign currency exchange rates. If the
U.S. dollar exhibits sustained weakness against most
foreign currencies, the U.S. dollar equivalents of unhedged
manufacturing costs could increase because a significant portion
of our production costs are foreign-currency denominated.
Conversely, there would not be an offsetting impact to revenues
since revenues are substantially U.S. dollar denominated.
Additionally, we negotiate and procure some of our component
requirements in U.S. dollars from Japanese and other
non-U.S. based
vendors. If the U.S. dollar continues to weaken against
other foreign currencies, some of our component suppliers may
increase the price they charge for their components in order to
maintain an equivalent profit margin. If this occurs, it would
have a negative impact on our operating results.
Prices for our products are substantially U.S. dollar
denominated, even when sold to customers that are located
outside the U.S. Therefore, as a substantial portion of our
sales are from countries outside the U.S., fluctuations in
currency exchanges rates, most notably the strengthening of the
U.S. dollar against other foreign currencies, contribute to
variations in sales of products in impacted jurisdictions and
could adversely impact demand and revenue growth. In addition,
currency variations can adversely affect margins on sales of our
products in countries outside the U.S.
We have attempted to manage the impact of foreign currency
exchange rate changes by, among other things, entering into
short-term, foreign exchange contracts. However, these contracts
do not cover our full exposure and can be canceled by the
counterparty if currency controls are put in place. Currently,
we hedge the Thai Baht, Malaysian Ringgit, Euro and British
Pound Sterling with foreign exchange contracts.
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Increases
in our customers credit risk could result in credit losses
and an increase in our operating costs.
Some of our OEM customers have adopted a subcontractor model
that requires us to contract directly with companies, such as
ODMs, that provide manufacturing services to our OEM customers.
Because these subcontractors are generally not as well
capitalized as our direct OEM customers, this subcontractor
model exposes us to increased credit risks. Our agreements with
our OEM customers may not permit us to increase our product
prices to alleviate this increased credit risk. Additionally, as
we attempt to expand our OEM and distribution channel sales into
emerging economies such as Brazil, Russia, India and China, the
customers with the most success in these regions may have
relatively short operating histories, making it more difficult
for us to accurately assess the associated credit risks. Any
credit losses we may suffer as a result of these increased
risks, or as a result of credit losses from any significant
customer, would increase our operating costs, which may
negatively impact our operating results.
Inaccurate
projections of demand for our product can cause large
fluctuations in our quarterly results.
We often ship a high percentage of our total quarterly sales in
the third month of the quarter, which makes it difficult for us
to forecast our financial results before the end of the quarter.
In addition, our quarterly projections and results may be
subject to significant fluctuations as a result of a number of
other factors including:
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the timing of orders from and shipment of products to major
customers;
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our product mix;
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changes in the prices of our products;
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manufacturing delays or interruptions;
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acceptance by customers of competing products in lieu of our
products;
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variations in the cost of and lead times for components for our
products;
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limited availability of components that we obtain from a single
or a limited number of suppliers;
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competition and consolidation in the data storage industry;
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seasonal and other fluctuations in demand for PCs often due to
technological advances; and
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availability and rates of transportation.
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Rapidly
changing conditions in the hard drive industry make it difficult
to predict actual results.
We have made and continue to make a number of estimates and
assumptions relating to our consolidated financial reporting.
The highly technical nature of our products and the rapidly
changing market conditions with which we deal means that actual
results may differ significantly from our estimates and
assumptions. These changes have impacted our financial results
in the past and may continue to do so in the future. Key
estimates and assumptions for us include:
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|
|
price protection adjustments and other sales promotions and
allowances on products sold to retailers, resellers and
distributors;
|
|
|
|
inventory adjustments for write-down of inventories to lower of
cost or market value (net realizable value);
|
|
|
|
reserves for doubtful accounts;
|
|
|
|
accruals for product returns;
|
|
|
|
accruals for warranty costs related to product defects;
|
|
|
|
accruals for litigation and other contingencies;
|
|
|
|
liabilities for unrecognized tax benefits; and
|
|
|
|
expensing of stock-based compensation.
|
32
The
market price of our common stock is volatile.
The market price of our common stock has been, and may continue
to be, extremely volatile. Factors such as the following may
significantly affect the market price of our common stock:
|
|
|
|
|
actual or anticipated fluctuations in our operating results;
|
|
|
|
announcements of technological innovations by us or our
competitors which may decrease the volume and profitability of
sales of our existing products and increase the risk of
inventory obsolescence;
|
|
|
|
new products introduced by us or our competitors;
|
|
|
|
periods of severe pricing pressures due to oversupply or price
erosion resulting from competitive pressures or industry
consolidation;
|
|
|
|
developments with respect to patents or proprietary rights;
|
|
|
|
conditions and trends in the hard drive, computer, data and
content management, storage and communication industries;
|
|
|
|
contraction in our operating results or growth rates that are
lower than our previous high growth-rate periods;
|
|
|
|
changes in financial estimates by securities analysts relating
specifically to us or the hard drive industry in
general; and
|
|
|
|
macroeconomic conditions that affect the market generally.
|
In addition, general economic conditions may cause the stock
market to experience extreme price and volume fluctuations from
time to time that particularly affect the stock prices of many
high technology companies. These fluctuations often appear to be
unrelated to the operating performance of the companies.
Securities class action lawsuits are often brought against
companies after periods of volatility in the market price of
their securities. A number of such suits have been filed against
us in the past, and should any new lawsuits be filed, such
matters could result in substantial costs and a diversion of
resources and managements attention.
Current
economic conditions have caused us difficulty in adequately
protecting our increased cash and cash equivalents from
financial institution failures.
The uncertain global economic conditions and volatile investment
markets have caused us to hold more cash and cash equivalents
than we would hold under normal circumstances. Since there has
been an overall increase in demand for low-risk,
U.S. government backed securities with a limited supply in
the financial marketplace, we face increased difficulty in
adequately protecting our increased cash and cash equivalents
from possible sudden and unforeseeable failures by banks and
other financial institutions. A failure of any of these
financial institutions in which deposits exceed FDIC limits
could have an adverse impact on our financial position.
If our
internal controls are found to be ineffective, our financial
results or our stock price may be adversely affected.
Our most recent evaluation resulted in our conclusion that as of
July 2, 2010, in compliance with Section 404 of the
Sarbanes-Oxley Act of 2002, our internal control over financial
reporting was effective. We believe that we currently have
adequate internal control procedures in place for future
periods; however, if our internal control over financial
reporting is found to be ineffective or if we identify a
material weakness or significant deficiency in our financial
reporting, investors may lose confidence in the reliability of
our financial statements, which may adversely affect our
financial results or our stock price.
From time
to time we may become subject to income tax audits or similar
proceedings, and as a result we may incur additional costs and
expenses or owe additional taxes, interest and penalties that
may negatively impact our operating results.
We are subject to income taxes in the U.S. and certain
foreign jurisdictions, and our determination of our tax
liability is subject to review by applicable domestic and
foreign tax authorities. For example, as we have previously
disclosed, we are under examination of certain of our fiscal
years by the U.S. Internal Revenue Service (the
IRS).
33
Although we believe our tax positions are reasonable, the
outcomes and timing of these audits are subject to significant
uncertainty and could result in our having to pay amounts to the
applicable tax authority in order to resolve examination of our
tax positions, which could result in an increase or decrease of
our current estimate of unrecognized tax benefits and may
negatively impact our financial position, results of operations,
net income or cash flows.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
Our corporate headquarters are located in Lake Forest,
California. The Lake Forest facilities consist of approximately
270,000 square feet of leased space and house our
management, research and development, administrative and sales
staff. We lease one facility in Irvine, California, consisting
of approximately 60,000 square feet, which we use to house
research and development, administrative and customer support
staff. In addition, we lease one facility in Aliso Viejo,
California, consisting of approximately 34,000 square feet,
which we assumed in connection with our acquisition of
SiliconSystems, Inc. and which we use to house research and
development, administrative and sales staff. We have entered
into a new lease agreement whereby we will relocate our Lake
Forest corporate headquarters and consolidate our existing
Irvine and Aliso Viejo, California functions to approximately
365,000 square feet of leased space in Irvine, California.
The relocation and consolidation of our corporate headquarters
is expected to occur in various phases beginning in the first
quarter of fiscal 2011 and continuing through the second quarter
of fiscal 2012.
In Fremont, California, we own facilities consisting of
approximately 286,000 square feet, which we use for head
wafer fabrication, research and development and warehousing. In
San Jose, California, we lease facilities consisting of
approximately 401,000 square feet, which we use for
research and development. In Phoenix, Arizona, we own wafer
fabrication facilities consisting of approximately
545,000 square feet, which we presently lease to a third
party but plan to occupy in late fiscal 2011. In Longmont,
Colorado, we lease one facility consisting of approximately
43,000 square feet, which we use for research and
development. We also lease office space in various other
locations throughout the world primarily for research and
development and sales and technical support.
We own manufacturing facilities in Kuala Lumpur, Malaysia,
consisting of approximately 1,054,000 square feet (which
includes a facility of approximately 479,000 square feet
acquired during fiscal 2010), which we use for assembly of hard
drives, printed circuit boards and HSAs. We also own
manufacturing facilities in Penang and Johor, Malaysia,
consisting of approximately 800,000 and 243,000 square
feet, respectively, and we own and lease manufacturing
facilities in Tuas, Singapore, consisting of approximately
311,000 square feet, all of which we use for our magnetic
media operations. We also own manufacturing facilities in
Navanakorn, Thailand, consisting of approximately
226,000 square feet, which we use for assembly of hard
drives and HSAs, and facilities in Bang Pa-In, Thailand,
consisting of approximately 901,000 square feet, which we
use for slider fabrication, the assembly of hard drives, HGAs
and HSAs, and research and development.
We believe our present facilities are adequate for our current
needs, although the process of upgrading our facilities to meet
technological and market requirements is expected to continue.
New manufacturing facilities, in general, can be developed and
become operational within approximately nine to eighteen months
should we require such additional facilities.
|
|
Item 3.
|
Legal
Proceedings
|
For a description of our legal proceedings, see Part II,
Item 8, Note 5 in our Notes to Consolidated Financial
Statements, which is incorporated by reference in response to
this item.
|
|
Item 4.
|
(Removed
and Reserved)
|
34
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities
|
Our common stock is listed on the New York Stock Exchange, Inc.
(NYSE) under the symbol WDC. The
approximate number of holders of record of our common stock as
of August 4, 2010 was 1,877.
We have not paid any cash dividends on our common stock and do
not intend to pay any cash dividends on common stock in the
foreseeable future.
The high and low sales prices of our common stock, as reported
by the NYSE, for each quarter of 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
37.70
|
|
|
$
|
44.96
|
|
|
$
|
47.44
|
|
|
$
|
45.09
|
|
Low
|
|
$
|
24.68
|
|
|
$
|
33.24
|
|
|
$
|
36.22
|
|
|
$
|
29.56
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
36.15
|
|
|
$
|
21.47
|
|
|
$
|
20.25
|
|
|
$
|
27.50
|
|
Low
|
|
$
|
20.65
|
|
|
$
|
9.48
|
|
|
$
|
10.81
|
|
|
$
|
18.14
|
|
We did not make any repurchases of our common stock during the
quarter ended July 2, 2010.
35
Stock
Performance Graph
The following graph compares the cumulative total stockholder
return of our common stock with the cumulative total return of
the S&P 500 Index and the Dow Jones US Technology
Hardware & Equipment Index for the five years ended
July 2, 2010. The graph assumes that $100 was invested in
our common stock at the close of market on July 1, 2005,
and that all dividends were reinvested. We have not declared any
cash dividends on our common stock. Stockholder returns over the
indicated period should not be considered indicative of future
stockholder returns.
TOTAL
RETURN TO STOCKHOLDERS
(Assumes $100 investment on
7/1/05)
Total
Return Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/1/05
|
|
|
6/30/06
|
|
|
6/29/07
|
|
|
6/27/08
|
|
|
7/3/09
|
|
|
7/2/10
|
Western Digital Corporation
|
|
|
|
100.00
|
|
|
|
|
143.97
|
|
|
|
|
140.63
|
|
|
|
|
253.42
|
|
|
|
|
190.55
|
|
|
|
|
219.48
|
|
S&P 500 Index
|
|
|
|
100.00
|
|
|
|
|
108.63
|
|
|
|
|
131.00
|
|
|
|
|
113.81
|
|
|
|
|
83.98
|
|
|
|
|
96.09
|
|
Dow Jones US Technology Hardware & Equipment Index
|
|
|
|
100.00
|
|
|
|
|
103.60
|
|
|
|
|
130.21
|
|
|
|
|
115.27
|
|
|
|
|
92.66
|
|
|
|
|
113.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The stock performance graph shall not be deemed soliciting
material or to be filed with the Securities and Exchange
Commission or subject to Regulation 14A or 14C under the
Securities Exchange Act of 1934 or to the liabilities of
Section 18 of the Securities Exchange Act of 1934, nor
shall it be incorporated by reference into any past or future
filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent we specifically
request that it be treated as soliciting material or
specifically incorporate it by reference into a filing under the
Securities Act of 1933 or the Securities Exchange Act of
1934.
36
|
|
Item 6.
|
Selected
Financial Data
|
Financial
Highlights
This selected consolidated financial data should be read
together with the Consolidated Financial Statements and related
Notes contained in this Annual Report on
Form 10-K
and in the subsequent reports filed with the SEC, as well as the
section of this Annual Report on
Form 10-K
and the other reports entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
June 27,
|
|
|
June 29,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions, except per share and employee data)
|
|
|
Revenue, net
|
|
$
|
9,850
|
|
|
$
|
7,453
|
|
|
$
|
8,074
|
|
|
$
|
5,468
|
|
|
$
|
4,341
|
|
Gross margin
|
|
$
|
2,401
|
|
|
$
|
1,337
|
|
|
$
|
1,739
|
|
|
$
|
900
|
|
|
$
|
829
|
|
Net income
|
|
$
|
1,382
|
|
|
$
|
470
|
|
|
$
|
867
|
|
|
$
|
564
|
|
|
$
|
395
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
6.06
|
|
|
$
|
2.12
|
|
|
$
|
3.92
|
|
|
$
|
2.57
|
|
|
$
|
1.84
|
|
Diluted
|
|
$
|
5.93
|
|
|
$
|
2.08
|
|
|
$
|
3.84
|
|
|
$
|
2.50
|
|
|
$
|
1.76
|
|
Working capital
|
|
$
|
2,697
|
|
|
$
|
1,705
|
|
|
$
|
1,167
|
|
|
$
|
899
|
|
|
$
|
633
|
|
Total assets
|
|
$
|
7,328
|
|
|
$
|
5,291
|
|
|
$
|
4,875
|
|
|
$
|
2,901
|
|
|
$
|
2,073
|
|
Long-term debt
|
|
$
|
294
|
|
|
$
|
400
|
|
|
$
|
482
|
|
|
$
|
10
|
|
|
$
|
19
|
|
Shareholders equity
|
|
$
|
4,709
|
|
|
$
|
3,192
|
|
|
$
|
2,696
|
|
|
$
|
1,716
|
|
|
$
|
1,157
|
|
Number of employees
|
|
|
62,500
|
|
|
|
45,991
|
|
|
|
50,072
|
|
|
|
29,572
|
|
|
|
24,750
|
|
No cash dividends were paid for the years presented.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements
The following discussion and analysis contains
forward-looking statements within the meaning of the federal
securities laws. You are urged to carefully review our
description and examples of forward-looking statements included
earlier in this Annual Report on
Form 10-K
immediately prior to Part I, under the heading
Forward-Looking Statements. Forward-looking
statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed
in the forward-looking statements. You are urged to carefully
review the disclosures we make concerning risks and other
factors that may affect our business and operating results,
including those made in Item 1A of this Annual Report on
Form 10-K,
and any of those made in our other reports filed with the SEC.
You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of
this document. We do not intend, and undertake no obligation, to
publish revised forward-looking statements to reflect events or
circumstances after the date of this document or to reflect the
occurrence of unanticipated events.
Our
Company
We design, develop, manufacture and sell hard drives. A hard
drive is a device that uses one or more rotating magnetic disks
(magnetic media) to store and allow fast access to
data. Hard drives are key components of computers, including
desktop and notebook computers (PCs), data storage
subsystems and many consumer electronic (CE) devices.
We sell our products worldwide to original equipment
manufacturers (OEMs) and original design
manufacturers (ODMs) for use in computer systems,
subsystems or CE devices, and to distributors, resellers and
retailers. Our hard drives are used in desktop computers,
notebook computers, and enterprise applications such as servers,
workstations, network attached storage, storage area networks
and video surveillance equipment. Additionally, our hard drives
are used in CE applications such as digital video recorders
(DVRs) and satellite and cable set-top boxes
(STBs). We also sell our hard drives as stand-alone
storage products by integrating them into finished enclosures,
embedding application software and offering the products as
WD®-branded
external storage appliances for personal data backup and
portable or expanded storage of digital music, photographs,
video and other digital data.
37
Hard drives provide non-volatile data storage, which means that
the data remains present when power is no longer applied to the
device. Our hard drives currently include 3.5-inch and 2.5-inch
form factor drives, having capacities ranging from 80 gigabytes
(GB) to 2 terabytes (TB), nominal
rotation speeds up to 10,000 revolutions per minute
(RPM), and offer interfaces including Enhanced
Integrated Drive Electronics (EIDE), Serial Advanced
Technology Attachment (SATA) and Serial Attached
SCSI (Small Computer System Interface) (SAS). We
also embed our hard drives into
WD®-branded
external storage appliances using interfaces such as Universal
Serial Bus (USB) 2.0, USB 3.0, external SATA,
FireWiretm
and Ethernet network connections with capacities of 160 GB up to
8 TB. In addition, we offer a family of hard drives specifically
designed to consume substantially less power than standard
drives, utilizing our WD GreenPower
Technologytm.
We also design, develop, manufacture and sell solid-state drives
and media players. A solid-state drive is a storage device that
uses semiconductor, non-volatile media, rather than magnetic
media and magnetic heads, to store and allow fast access to
data. We sell our solid-state drives worldwide to OEMs and
distributors for use in the embedded systems and client PC
markets. A media player is a device that connects to a
users television, the Internet or home theater system and
plays digital movies, music and photos from any of our
WD®-branded
external hard drives, other USB mass storage devices or content
services accessed over the Internet. We sell our media players
worldwide to resellers and retailers under the
WD®
brand.
In November 2009, we entered the traditional enterprise market
with the WD S25, 2.5-inch, SAS interface hard drives. The WD S25
drive provides up to 300 GB of storage suitable for both
mission-critical enterprise server and enterprise storage
applications, as well as data centers and large data arrays.
Results
of Operations
Fiscal
2010 Overview
In 2010, our net revenue increased by 32% to $9.8 billion
on hard drive shipments of 194 million units as compared to
$7.5 billion and 146 million units, respectively, in
2009. In 2010, 64% of our hard drive net revenue was derived
from non-desktop markets, including notebook computers, CE
products, enterprise applications, and WD-branded product sales,
as compared to 62% in 2009. Hard drive average selling price
(ASP) decreased to $50 in 2010 from $51 in 2009.
Gross margin percentage increased to 24.4% in 2010 from 17.9% in
2009. Operating income increased by $1.0 billion to
$1.5 billion in 2010. Operating income was
$519 million in 2009, which included a $14 million
in-process research and development charge related to the
acquisition of SiliconSystems, Inc.
(SiliconSystems), $112 million of restructuring
charges and an $18 million gain on the sale of assets from
our substrate manufacturing facility in Sarawak, Malaysia. As a
percentage of net revenue, operating income was 15.5% in 2010
compared to 7.0% in 2009. Net income in 2010 was
$1.4 billion, or $5.93 per diluted share, compared to
$470 million, or $2.08 per diluted share, in 2009.
On June 30, 2010, we acquired the facilities, equipment,
intellectual property and working capital of the magnetic media
sputtering operations of Hoya Corporation and Hoya Magnetics
Singapore Pte. Ltd. (Hoya). The acquisition is
intended to augment our existing magnetic media operations,
strengthening our ability to meet anticipated growth in demand
for hard drives. The cost of the acquisition was approximately
$233 million and was funded with available cash.
For the September quarter, we expect our revenue to be
relatively flat with the June quarter as a result of lower than
historical demand growth rates and competitive pricing
conditions.
38
Summary
Comparison of 2010, 2009 and 2008
The following table sets forth, for the periods presented,
summary information from our consolidated statements of income
by dollars and percentage of net revenue (in millions, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
July 2, 2010
|
|
|
July 3, 2009
|
|
|
June 27, 2008
|
|
|
Revenue, net
|
|
$
|
9,850
|
|
|
|
100.0
|
%
|
|
$
|
7,453
|
|
|
|
100.0
|
%
|
|
$
|
8,074
|
|
|
|
100.0
|
%
|
Gross margin
|
|
|
2,401
|
|
|
|
24.4
|
|
|
|
1,337
|
|
|
|
17.9
|
|
|
|
1,739
|
|
|
|
21.5
|
|
R&D and SG&A
|
|
|
876
|
|
|
|
8.9
|
|
|
|
710
|
|
|
|
9.5
|
|
|
|
684
|
|
|
|
8.5
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
0.2
|
|
|
|
49
|
|
|
|
0.6
|
|
Restructuring and other, net
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,525
|
|
|
|
15.5
|
|
|
|
519
|
|
|
|
7.0
|
|
|
|
1,006
|
|
|
|
12.4
|
|
Other expense, net
|
|
|
(5
|
)
|
|
|
(0.1
|
)
|
|
|
(18
|
)
|
|
|
(0.2
|
)
|
|
|
(25
|
)
|
|
|
(0.3
|
)
|
Income before income taxes
|
|
|
1,520
|
|
|
|
15.4
|
|
|
|
501
|
|
|
|
6.7
|
|
|
|
981
|
|
|
|
12.1
|
|
Income tax provision
|
|
|
138
|
|
|
|
1.4
|
|
|
|
31
|
|
|
|
0.4
|
|
|
|
114
|
|
|
|
1.4
|
|
Net income
|
|
|
1,382
|
|
|
|
14.0
|
|
|
|
470
|
|
|
|
6.3
|
|
|
|
867
|
|
|
|
10.7
|
|
The following table sets forth, for the periods presented,
summary information regarding unit shipments, ASPs and revenues
by geography, channel and product (in millions, except
percentages and ASPs):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
June 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenue
|
|
$
|
9,850
|
|
|
$
|
7,453
|
|
|
$
|
8,074
|
|
Unit shipments*
|
|
|
194
|
|
|
|
146
|
|
|
|
133
|
|
ASPs (per unit)*
|
|
$
|
50
|
|
|
$
|
51
|
|
|
$
|
59
|
|
Revenues by Geography(%)
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
24
|
%
|
|
|
24
|
%
|
|
|
31
|
%
|
Europe, Middle East and Africa
|
|
|
23
|
|
|
|
27
|
|
|
|
30
|
|
Asia
|
|
|
53
|
|
|
|
49
|
|
|
|
39
|
|
Revenues by Channel(%)
|
|
|
|
|
|
|
|
|
|
|
|
|
OEMs
|
|
|
51
|
%
|
|
|
54
|
%
|
|
|
51
|
%
|
Distributors
|
|
|
31
|
|
|
|
26
|
|
|
|
31
|
|
Retailers
|
|
|
18
|
|
|
|
20
|
|
|
|
18
|
|
Revenues by Product(%)
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-desktop sources
|
|
|
64
|
%
|
|
|
62
|
%
|
|
|
56
|
%
|
Desktop hard drives
|
|
|
36
|
|
|
|
38
|
|
|
|
44
|
|
|
|
|
* |
|
Based on sales of hard drive units only. Non-hard drive units
were not material. |
In accordance with accounting principles generally accepted in
the United States U.S. (U.S. GAAP),
operating results for Hoya, SiliconSystems, and Komag,
Incorporated (Komag) which were acquired on
June 30, 2010, March 27, 2009 and September 5,
2007, respectively, prior to the dates of their acquisitions are
not included in our operating results.
Fiscal
Year 2010 Compared to Fiscal Year 2009
Net Revenue. Net revenue was $9.8 billion
for 2010, an increase of 32% from 2009. Total hard drive
shipments increased to 194 million units as compared to
146 million units for the prior year. The increase in net
revenue resulted primarily from an increase in unit shipments
due to the strong demand for hard drives, particularly in the
mobile PC market. We shipped 80 million mobile drives in
2010 as compared to 55 million units in 2009. The increase
in mobile
39
unit shipments was driven by continued strength in notebook and
netbook PC demand, coupled with increased customer preference
for our product offerings.
Changes in revenue by geography generally reflect normal
fluctuations in market demand and competitive dynamics, as well
as demand strength in Asia, which continues to be driven by the
concentration of global manufacturing in that region. Changes in
revenue by channel are a result of normal fluctuations in market
demand and competitive dynamics.
In accordance with standard industry practice, we have sales
incentive and marketing programs that provide customers with
price protection and other incentives or reimbursements that are
recorded as a reduction to gross revenue. For 2010, these
programs represented 8% of gross revenues compared to 11% in
2009. These amounts generally vary according to several factors
including industry conditions, seasonal demand, competitor
actions, channel mix and overall availability of product.
Gross Margin. Gross margin for 2010 was
$2.4 billion, an increase of $1.1 billion, or 80% over
the prior year. Gross margin as a percentage of net revenue
increased to 24.4% in 2010 from 17.9% in 2009. This increase was
primarily due to higher volume, lower costs, a favorable product
mix and a moderate pricing environment.
Operating Expenses. Total research and
development (R&D) expense and selling, general
and administrative (SG&A) expense decreased to
8.9% of net revenue in 2010 compared to 9.5% in 2009. R&D
expense was $611 million in 2010, an increase of
$102 million, or 20% over the prior year. This increase in
R&D expense was primarily due to a $68 million
increase relating to product development to support new programs
and a $34 million increase in variable incentive
compensation. As a percentage of net revenue, R&D expense
decreased to 6.2% in 2010 compared to 6.8% in 2009 primarily due
to an increase in net revenue in 2010 compared to 2009.
SG&A expense was $265 million in 2010, an increase of
$64 million, or 32%, as compared to 2009. This increase in
SG&A expense was primarily due to $27 million of
expense related to litigation settlements, a $19 million
increase in variable incentive compensation and an
$18 million increase in the expansion of our sales and
marketing presence into new regions. SG&A expense as a
percentage of net revenue remained consistent at 2.7% in 2010
and 2009.
During 2009, we recorded a $14 million in-process research
and development charge related to the acquisition of
SiliconSystems. This charge relates to projects that were not
ready for commercial production and had no alternative future
use and, therefore, the fair value of the development effort did
not qualify for capitalization and was immediately expensed.
During 2009, we also recorded $112 million in restructuring
charges and an $18 million gain on the sale of our
substrate manufacturing facility, and related assets, in
Sarawak, Malaysia.
Other Income (Expense). Other expense, net was
$5 million in 2010 compared to $18 million in 2009.
This decrease was primarily due to no impairment charges related
to our auction-rate securities in 2010, compared to
$10 million in
other-than-temporary
losses in 2009, as well as decreases in the variable interest
rate on a lower amount of debt.
Income Tax Provision. Income tax expense was
$138 million in 2010 as compared to $31 million in
2009. Tax expense as a percentage of income before taxes was 9%
in 2010 compared to 6% for 2009. In 2009, income tax expense
included a provision of $42 million offset by
$6 million in tax benefits related to the extension of the
U.S. Federal research and development tax credit enacted
into law in October 2008, and a favorable adjustment of
$5 million to previously recorded tax accruals and credits.
Differences between the effective tax rate and the
U.S. Federal statutory rate are primarily due to tax
holidays in Malaysia and Thailand that expire at various dates
through 2022 and the current year generation of income tax
credits.
We recognized a net $94 million increase in the liability
for unrecognized tax benefits during 2010. As of July 2,
2010, we had approximately $230 million of unrecognized tax
benefits which, if recognized, would decrease the effective tax
rate in subsequent years.
Fiscal
Year 2009 Compared to Fiscal Year 2008
Net Revenue. Net revenue was $7.5 billion
for 2009, a decrease of 8% from 2008. Total unit shipments of
hard drives increased to 146 million as compared to
133 million for the prior year. The decrease in revenue
primarily resulted from a decline in our ASPs which reflected a
more competitive pricing environment, particularly in the
notebook and
40
branded markets. The decline in our ASPs was partially offset by
an increase in unit shipments of mobile drives. We shipped
56 million mobile drives in 2009 as compared to
37 million units in 2008. The increase in mobile unit
shipments was driven by continued strength in notebook and
netbook PC demand, coupled with increased customer preference
for our product offerings.
Changes in revenue by geography and by channel generally reflect
normal fluctuations in market demand and competitive dynamics as
well as demand strength in Asia, which continued to be driven by
the concentration of global manufacturing in that region.
Changes in revenue by channel are a result of increases in sales
of mobile hard drives to OEMs.
In accordance with standard industry practice, we have sales
incentive and marketing programs that provide customers with
price protection and other incentives or reimbursements that are
recorded as a reduction to gross revenue. For 2009, these
programs represented 11% of gross revenues compared to 10% in
2008. These amounts generally vary according to several factors
including industry conditions, seasonal demand, competitor
actions, channel mix and overall availability of product.
Gross Margin. Gross margin for 2009 was
$1.3 billion, a decrease of $402 million, or 23% over
the prior year. Gross margin percentage decreased to 17.9% in
2009 from 21.5% in 2008. This decrease is due to a more
competitive pricing environment primarily resulting from an
increase in product offerings in the mobile and branded markets.
Operating Expenses. Total R&D expense and
SG&A expense increased to 9.5% of net revenue in 2009
compared to 8.5% in 2008. R&D expense was $509 million
in 2009, an increase of $45 million, or 10% over the prior
year. This increase in R&D expense includes
$76 million relating to product development to support new
programs offset by a $31 million decrease in variable
incentive compensation. As a percentage of net revenue, R&D
expense increased to 6.8% in 2009 compared to 5.7% in 2008
primarily due to continued investment in product development.
SG&A expense was $201 million in 2009, a decrease of
$19 million, or 8.6%, as compared to 2008. This decrease in
SG&A expense primarily resulted from a $19 million
decrease in variable incentive compensation and a
$6 million insurance recovery, offset by a $6 million
net increase in the expansion of our sales and marketing
presence into new regions. SG&A expense was 2.7% as a
percentage of net revenue in both 2009 and 2008.
During 2009, we recorded a $14 million in-process research
and development charge related to the acquisition of
SiliconSystems. During 2008, we recorded a $49 million
in-process research and development charge related to the
acquisition of Komag. These charges relate to projects that were
not ready for commercial production and had no alternative
future use and, therefore, the fair value of the development
effort did not quality for capitalization and was immediately
expensed. During 2009, we also recorded $112 million in
restructuring charges and an $18 million gain on the sale
of our substrate manufacturing facility, and related assets, in
Sarawak, Malaysia.
Other Income (Expense). Net interest and other
expense was $18 million in 2009 compared to
$25 million in 2008. This change was primarily due to a
decrease in the variable interest rate on our debt and a
$3 million decrease in losses on our auction-rate
securities.
Income Tax Provision. Income tax expense was
$31 million in 2009 compared to $114 million in 2008.
Tax expense as a percentage of income before taxes was 6% in
2009 compared to 12% for 2008. In 2009, income tax expense
included a provision of $42 million offset by
$6 million in tax benefits related to the extension of the
U.S. Federal research and development tax credit, enacted
into law in October 2008, and a favorable adjustment of
$5 million to previously recorded tax accruals and credits.
In 2008, tax expense included net charges of $60 million
for taxes incurred upon the license of certain intellectual
property to a foreign subsidiary in our first fiscal quarter.
Differences between the effective tax rate and the
U.S. Federal statutory rate are primarily due to tax
holidays in Malaysia and Thailand that expire at various dates
through 2022 and the current year generation of income tax
credits.
We recognized a $29 million increase in the liability for
unrecognized tax benefits during 2009. As of July 3, 2009,
we had approximately $136 million of unrecognized tax
benefits which, if recognized, would decrease the effective tax
rate in subsequent years.
41
Liquidity
and Capital Resources
We ended 2010 with total cash and cash equivalents of
$2.7 billion, an increase of $940 million from
July 3, 2009. The following table summarizes our statements
of cash flows for the three years ended July 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
June 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
1,942
|
|
|
$
|
1,305
|
|
|
$
|
1,399
|
|
Investing activities
|
|
|
(986
|
)
|
|
|
(551
|
)
|
|
|
(1,321
|
)
|
Financing activities
|
|
|
(16
|
)
|
|
|
(64
|
)
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
940
|
|
|
$
|
690
|
|
|
$
|
404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our investment policy is to manage our investment portfolio to
preserve principal and liquidity while maximizing return through
the full investment of available funds. We believe our current
cash, cash equivalents and cash generated from operations will
be sufficient to meet our working capital and capital
expenditure needs through the foreseeable future. Our ability to
sustain our working capital position is subject to a number of
risks that we discuss in Item 1A of this Annual Report on
Form 10-K.
Operating
Activities
Net cash provided by operating activities during 2010 was
$1.9 billion as compared to $1.3 billion for 2009 and
$1.4 billion for 2008. Cash flow from operating activities
consists of net income, adjusted for non-cash charges, plus or
minus working capital changes. This represents our principal
source of cash. Net cash used to fund working capital was
$37 million for 2010 as compared to net cash provided by
working capital changes of $198 million for 2009 and
$22 million for 2008.
Our working capital requirements primarily depend on the
effective management of our cash conversion cycle, which
measures how quickly we can convert our products into cash
through sales. The average quarterly cash conversion cycles for
the three years ended 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
June 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Days sales outstanding
|
|
|
46
|
|
|
|
47
|
|
|
|
46
|
|
Days in inventory
|
|
|
23
|
|
|
|
26
|
|
|
|
27
|
|
Days payables outstanding
|
|
|
(72
|
)
|
|
|
(67
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash conversion cycle
|
|
|
(3
|
)
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For 2010, our average days sales outstanding (DSOs)
decreased by 1 day, days in inventory (DIOs)
decreased by 3 days, and days payables outstanding
(DPOs) increased by 5 days. The decreases in
average DSOs and DIOs were primarily the result of the strong
demand environment that existed during the first three quarters
of 2010, which led to better sales linearity and faster
inventory turns during the corresponding period. DSOs and DIOs
for the fourth quarter were 48 and 28, respectively. Changes in
DPOs are generally related to production volume and the timing
of purchases during the period. From time to time, we modify the
timing of payments to our vendors. We make modifications
primarily to manage our vendor relationships and to manage our
cash flows, including our cash balances. Generally, we make the
payment modifications through negotiations with our vendors or
by granting to, or receiving from, our vendors payment
term accommodations.
Investing
Activities
Net cash used in investing activities for 2010 was
$986 million as compared to $551 million for 2009 and
$1.3 billion for 2008. During 2010, cash used in investing
activities consisted primarily of $737 million for capital
expenditures, $233 million used for the acquisition of the
magnetic media sputtering operations of Hoya and
$20 million
42
used for the acquisition of a semiconductor wafer fabrication
facility. During 2009, cash used in investing activities
consisted primarily of $519 million for capital
expenditures and $63 million for the acquisition of
SiliconSystems, net of cash acquired, partially offset by
$29 million in proceeds from the sale of property and
equipment. During 2008, cash used in investing activities
consisted of $927 million for the acquisition of Komag, net
of cash acquired, and $615 million for capital
expenditures, partially offset by net cash provided by
short-term investment activity of $221 million. Capital
expenditures in 2010 primarily consisted of the expansion of our
head wafer fabrication facilities, continued investment in
advanced head technologies and increased capacity for our
broadening and growing product portfolio.
For fiscal 2011, we expect capital expenditures to be between 7%
and 8% of revenue, plus approximately $200 million related
to the conversion of our head wafer fabrication facilities to
utilize
8-inch
wafers from
6-inch
wafers and expenditures to optimize the output from our recently
acquired magnetic media sputtering operations. We expect
depreciation and amortization to be approximately
$650 million for fiscal 2011.
Our cash equivalents are invested in highly liquid money market
funds which are invested in U.S. Treasury securities,
U.S. Treasury bills and U.S. Government agency
securities. We also have auction-rate securities that are
classified as long-term investments as they are expected to be
held until secondary markets become available. These investments
are currently accounted for as
available-for-sale
securities and recorded at fair value within other non-current
assets in the consolidated balance sheet. The estimated market
values of these investments are subject to fluctuation. During
the year ended July 2, 2010, we sold $3 million of
auction-rate securities, reducing the carrying value of these
investments to $15 million.
Financing
Activities
Net cash used by financing activities for 2010 was
$16 million as compared to $64 million for 2009. Net
cash provided by financing activities was $326 million for
2008. Net cash used by financing activities in 2010 consisted of
$82 million used to repay long-term debt, partially offset
by a net $66 million provided by employee stock plans. Net
cash used by financing activities in 2009 consisted of
$36 million used to repurchase our common stock,
$27 million used to repay long-term debt and a net
$1 million used by employee stock plans. Net cash provided
by financing activities in 2008 consisted of $500 million
in net proceeds from debt and a net $149 million provided
by employee stock plans, offset by a $250 million repayment
of convertible debentures assumed in the acquisition of Komag,
$60 million used to repurchase our common stock and
$13 million used to repay other long-term debt.
Off-Balance
Sheet Arrangements
Other than facility lease commitments incurred in the normal
course of business and certain indemnification provisions (see
Contractual Obligations and Commitments below), we
do not have any off-balance sheet financing arrangements or
liabilities, guarantee contracts, retained or contingent
interests in transferred assets, or any obligation arising out
of a material variable interest in an unconsolidated entity. We
do not have any majority-owned subsidiaries that are not
included in the consolidated financial statements. Additionally,
we do not have an interest in, or relationships with, any
special-purpose entities.
Contractual
Obligations and Commitments
The following is a summary of our significant contractual cash
obligations and commercial commitments as of July 2, 2010
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Long-term debt, including current portion
|
|
$
|
400
|
|
|
$
|
106
|
|
|
$
|
294
|
|
|
$
|
|
|
|
$
|
|
|
Operating leases
|
|
|
99
|
|
|
|
15
|
|
|
|
27
|
|
|
|
22
|
|
|
|
35
|
|
Unrecognized tax benefits
|
|
|
135
|
|
|
|
|
|
|
|
14
|
|
|
|
121
|
|
|
|
|
|
Purchase obligations
|
|
|
4,210
|
|
|
|
3,566
|
|
|
|
637
|
|
|
|
6
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,844
|
|
|
$
|
3,687
|
|
|
$
|
972
|
|
|
$
|
149
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
Long-Term
Debt
In February 2008, Western Digital Technologies, Inc.
(WDTI), a wholly-owned subsidiary of the Company,
entered into a five-year Credit Agreement that provided for a
$500 million term loan facility. As of July 2, 2010,
the remaining balance of the term loan facility was
$400 million, which requires principal payments totaling
$106 million in 2011, $144 million in 2012 and
$150 million in 2013. See Part II, Item 8,
Note 3 in the Notes to Consolidated Financial Statements
included in this Annual Report on
Form 10-K.
Purchase
Orders
In the normal course of business, we enter into purchase orders
with suppliers for the purchase of hard drive components used to
manufacture our products. These purchase orders generally cover
forecasted component supplies needed for production during the
next quarter, are recorded as a liability upon receipt of the
components, and generally may be changed or canceled at any time
prior to shipment of the components. We also enter into purchase
orders with suppliers for capital equipment that are recorded as
a liability upon receipt of the equipment. Our ability to change
or cancel a capital equipment purchase order without penalty
depends on the nature of the equipment being ordered. In some
cases, we may be obligated to pay for certain costs related to
changes to, or cancellation of, a purchase order, such as costs
incurred for raw materials or work in process of components or
capital equipment.
We have entered into long-term purchase agreements with various
component suppliers, which contain minimum quantity
requirements. However, the dollar amount of the purchases may
depend on the specific products ordered, achievement of
pre-defined quantity or quality specifications or future price
negotiations. The estimated related minimum purchase
requirements are included in Purchase obligations in
the table above. We have also entered into long-term purchase
agreements with various component suppliers that carry fixed
volumes and pricing which obligate us to make certain future
purchases, contingent on certain conditions of performance,
quality and technology of the vendors components. These
arrangements are included under Purchase obligations
in the table above.
We enter into, from time to time, other long-term purchase
agreements for components with certain vendors. Generally,
future purchases under these agreements are not fixed and
determinable as they depend on our overall unit volume
requirements and are contingent upon the prices, technology and
quality of the suppliers products remaining competitive.
These arrangements are not included under Purchase
obligations in the table above. Please see Item 1A of
this Annual Report on
Form 10-K
for a discussion of risks related to these commitments.
Foreign
Exchange Contracts
We purchase short-term, foreign exchange contracts to hedge the
impact of foreign currency fluctuations on certain underlying
assets, revenue, liabilities and commitments for operating
expenses and product costs denominated in foreign currencies.
See Part II, Item 7A, under the heading
Disclosure About Foreign Currency Risk, for a
description of our current foreign exchange contract commitments
and Part II, Item 8, Notes 1 and 11 in the Notes
to Consolidated Financial Statements, included in this Annual
Report on
Form 10-K.
Indemnifications
In the ordinary course of business, we may provide
indemnifications of varying scope and terms to customers,
vendors, lessors, business partners and other parties with
respect to certain matters, including, but not limited to,
losses arising out of our breach of such agreements, products or
services to be provided by us, or from intellectual property
infringement claims made by third parties. In addition, we have
entered into indemnification agreements with our directors and
certain of our officers that will require us, among other
things, to indemnify them against certain liabilities that may
arise by reason of their status or service as directors or
officers. We maintain director and officer insurance, which may
cover certain liabilities arising from our obligation to
indemnify our directors and officers in certain circumstances.
It is not possible to determine the maximum potential amount
under these indemnification agreements due to the limited
history of prior indemnification claims and the unique facts and
circumstances involved in each particular agreement. Such
indemnification agreements may not be subject to maximum loss
clauses. Historically, we have not incurred material costs as a
result of obligations under these agreements.
44
Unrecognized
Tax Benefits
As of July 2, 2010, our total cash liability representing
unrecognized tax benefits was $135 million. We estimate the
timing of the future payments of these liabilities to be within
the next two to five years. See Part II, Item 8, Note
9 in the Notes to Condensed Consolidated Financial Statements
included in this Annual Report on
Form 10-K
for information regarding our tax liability for unrecognized tax
benefits.
Stock
Repurchase Program
Our Board of Directors previously authorized us to repurchase
$750 million of our common stock in open market
transactions under a stock repurchase program through
March 31, 2013. Since the inception of this program in
2005, through July 2, 2010, we have repurchased
18 million shares for a total cost of $284 million. We
expect stock repurchases to be funded principally by operating
cash flows. We may continue to repurchase our stock as we deem
appropriate and market conditions allow. We did not make any
repurchases of common stock under the authorized stock
repurchase program during 2010. Subsequent to July 2, 2010
through August 13, 2010, we repurchased 1.8 million
shares for a total cost of $50 million.
Critical
Accounting Policies and Estimates
We have prepared the accompanying consolidated financial
statements in accordance with U.S. GAAP. The preparation of
the financial statements requires the use of judgments and
estimates that affect the reported amounts of revenues,
expenses, assets, liabilities and shareholders equity. We
have adopted accounting policies and practices that are
generally accepted in the industry in which we operate. We
believe the following are our most critical accounting policies
that affect significant areas and involve judgment and estimates
made by us. If these estimates differ significantly from actual
results, the impact to the consolidated financial statements may
be material.
Revenue
and Accounts Receivable
In accordance with standard industry practice, we provide
distributors and retailers (collectively referred to as
resellers) with limited price protection for
inventories held by resellers at the time of published list
price reductions, and we provide resellers and OEMs with other
sales incentive programs. At the time we recognize revenue to
resellers and OEMs, we record a reduction of revenue for
estimated price protection until the resellers sell such
inventory to their customers and we also record a reduction of
revenue for the other programs in effect. We base these
adjustments on several factors including anticipated price
decreases during the reseller holding period, resellers
sell-through and inventory levels, estimated amounts to be
reimbursed to qualifying customers, historical pricing
information and customer claim processing. If customer demand
for hard drives or market conditions differ from our
expectations, our operating results could be materially
affected. We also have programs under which we reimburse
qualified distributors and retailers for certain marketing
expenditures which are recorded as a reduction of revenue. These
amounts generally vary according to several factors including
industry conditions, seasonal demand, competitor actions,
channel mix and overall availability of product. Since 2008,
total sales incentive and marketing programs have ranged from 7%
to 12% of gross revenues per quarter. Changes in future customer
demand and market conditions may require us to adjust our
incentive programs as a percentage of gross revenue from the
current range. Adjustments to revenues due to changes in
accruals for these programs related to revenues reported in
prior periods have averaged 0.1% of quarterly gross revenue
since the first quarter of fiscal 2008.
We record an allowance for doubtful accounts by analyzing
specific customer accounts and assessing the risk of loss based
on insolvency, disputes or other collection issues. In addition,
we routinely analyze the different receivable aging categories
and establish reserves based on a combination of past due
receivables and expected future losses based primarily on our
historical levels of bad debt losses. If the financial condition
of a significant customer deteriorates resulting in its
inability to pay its accounts when due, or if our overall loss
history changes significantly, an adjustment in our allowance
for doubtful accounts would be required, which could materially
affect operating results.
We establish provisions against revenue and cost of revenue for
sales returns in the same period that the related revenue is
recognized. We base these provisions on existing product return
notifications. If actual sales returns exceed expectations, an
increase in the sales return accrual would be required, which
could materially affect operating results.
45
Warranty
We record an accrual for estimated warranty costs when revenue
is recognized. We generally warrant our products for a period of
one to five years. Our warranty provision considers estimated
product failure rates and trends, estimated repair or
replacement costs and estimated costs for customer compensatory
claims related to product quality issues, if any. We use a
statistical warranty tracking model to help prepare our
estimates and assist us in exercising judgment in determining
the underlying estimates. Our statistical tracking model
captures specific detail on hard drive reliability, such as
factory test data, historical field return rates, and costs to
repair by product type. Our judgment is subject to a greater
degree of subjectivity with respect to newly introduced products
because of limited field experience with those products upon
which to base our warranty estimates. We review our warranty
accrual quarterly for products shipped in prior periods and
which are still under warranty. Any changes in the estimates
underlying the accrual may result in adjustments that impact
current period gross margin and income. Such changes are
generally a result of differences between forecasted and actual
return rate experience and costs to repair. If actual product
return trends, costs to repair returned products or costs of
customer compensatory claims differ significantly from our
estimates, our future results of operations could be materially
affected. For a summary of historical changes in estimates
related to pre-existing warranty provisions, refer to
Part II, Item 8, Note 4 in the Notes to the
Consolidated Financial Statements included in this Annual Report
on
Form 10-K.
Inventory
We value inventories at the lower of cost
(first-in,
first-out and weighted average methods) or net realizable value.
We use the
first-in,
first-out method to value the cost of the majority of our
inventories, while we use the weighted-average method to value
precious metal inventories. Weighted-average cost is calculated
based upon the cost of precious metals at the time they are
received by us. We have determined that it is not practicable to
assign specific costs to individual units of precious metals
and, as such, we relieve our precious metals inventory based on
the weighted-average cost of the inventory at the time the
inventory is used in production. The weighted average method of
valuing precious metals does not materially differ from a
first-in,
first-out method. We record inventory write-downs for the
valuation of inventory at the lower of cost or net realizable
value by analyzing market conditions and estimates of future
sales prices as compared to inventory costs and inventory
balances.
We evaluate inventory balances for excess quantities and
obsolescence on a regular basis by analyzing estimated demand,
inventory on hand, sales levels and other information, and
reduce inventory balances to net realizable value for excess and
obsolete inventory based on this analysis. Unanticipated changes
in technology or customer demand could result in a decrease in
demand for one or more of our products, which may require a
write down of inventory that could materially affect operating
results.
Litigation
and Other Contingencies
We disclose material contingencies deemed to be reasonably
possible and accrue loss contingencies when, in consultation
with our legal advisors, we conclude that a loss is probable and
reasonably estimable. The ability to predict the ultimate
outcome of such matters involves judgments, estimates and
inherent uncertainties. The actual outcome of such matters could
differ materially from managements estimates. Refer to
Part II, Item 8, Note 5 in the Notes to
Consolidated Financial Statements, included in this Annual
Report on
Form 10-K.
Income
Taxes
We account for income taxes under the asset and liability
method, which provides that deferred tax assets and liabilities
be recognized for temporary differences between the financial
reporting basis and the tax basis of our assets and liabilities
and expected benefits of utilizing net operating loss
(NOL) and tax credit carryforwards. We record a
valuation allowance when it is more likely than not that the
deferred tax assets will not be realized. Each quarter we
evaluate the need for a valuation allowance for our deferred tax
assets and we adjust the valuation allowance so that we record
net deferred tax assets only to the extent that we conclude it
is more likely than not that these deferred tax assets will be
realized.
We recognize liabilities for uncertain tax positions based on a
two-step process. To the extent a tax position does not meet a
more-likely-than-not level of certainty, no benefit is
recognized in the financial statements. If a position meets the
46
more-likely-than-not level of certainty, it is recognized in the
financial statements at the largest amount that has a greater
than 50% likelihood of being realized upon ultimate settlement.
Interest and penalties related to unrecognized tax benefits are
recognized on liabilities recorded for uncertain tax positions
and are recorded in our provision for income taxes. The actual
liability for unrealized tax benefit in any such contingency may
be materially different from our estimates, which could result
in the need to record additional liabilities for unrecognized
tax benefits or potentially adjust previously-recorded
liabilities for unrealized tax benefits and materially affect
our operating results.
Stock-Based
Compensation
We account for all stock-based compensation at fair value.
Stock-based compensation cost is measured at the grant date
based on the value of the award and is recognized as expense
over the vesting period. The fair values of all stock options
granted are estimated using a binomial model, and the fair
values of all Employee Stock Purchase Plan (ESPP)
purchase rights are estimated using the Black-Scholes-Merton
option-pricing model. Both the binomial and the
Black-Scholes-Merton models require the input of highly
subjective assumptions. We are required to use judgment in
estimating the amount of stock-based awards that are expected to
be forfeited. If actual forfeitures differ significantly from
the original estimate, stock-based compensation expense and our
results of operations could be materially affected.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued Accounting Standard Codification
(ASC) 820, Fair Value Measurements and
Disclosures (ASC 820), which establishes a
framework for measuring fair value under U.S. GAAP and
expands disclosures about fair value measurement. In February
2008, FASB issued
ASC 820-10-65-1,
Fair Value Measurements and Disclosures
Transition and Open Effective Date Information, which
delayed the effective date of ASC 820 for all non-financial
assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial
statements on a recurring basis, until fiscal years beginning
after November 15, 2008 and interim periods within those
years, which for us was the first quarter of fiscal 2010. Our
adoption of the provisions of ASC 820 for non-financial
assets and non-financial liabilities in the first quarter of
fiscal 2010 had no impact on our consolidated financial
statements.
In December 2007, the FASB issued ASC 805, Business
Combinations (ASC 805). ASC 805
establishes principles and requirements for how the acquirer of
a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree. ASC 805 also
provides guidance for recognizing and measuring the goodwill
acquired in the business combination or a gain from a bargain
purchase and determines what information to disclose to enable
users of financial statements to evaluate the nature and
financial effects of the business combination. ASC 805
applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008, which for us was the first quarter of fiscal 2010.
ASC 805 impacted our consolidated financial statements for
business combinations with an acquisition date on or after
adoption in the first quarter of fiscal 2010. For business
combinations in which the acquisition date was before the
adoption date, the provision of ASC 805 requires changes in
the amount of income tax uncertainties to be recognized in
earnings rather than as an adjustment to the accounting for
prior business combinations. Our adoption of ASC 805 in the
first quarter of fiscal 2010 did not have a material impact on
our consolidated financial statements.
In April 2008, the FASB issued
ASC 350-30-65-1,
General Intangibles Other than Goodwill
Transition and Open Effective Date Information (ASC
350-30-65-1),
which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under ASC 350,
Intangibles Goodwill and Other.
ASC 350-30-65-1
is effective for fiscal years beginning on or after
December 15, 2008, which for us was the first quarter of
fiscal 2010. Our adoption of
ASC 350-30-65-1
in the first quarter of fiscal 2010 had no impact on our
consolidated financial statements.
In September 2009, the FASB issued Accounting Standards Update
(ASU)
2009-13,
Multiple-Deliverable Revenue Arrangements (ASU
2009-13),
and ASU
2009-14,
Certain Revenue Arrangements That Include Software
Elements (ASU
2009-14).
ASU 2009-13
amends the revenue guidance under Subtopic
605-25,
Multiple Element Arrangements, and addresses how to
determine whether an arrangement involving multiple deliverables
contains more than one unit of accounting and how arrangement
consideration shall be measured and allocated to the separate
units of
47
accounting in the arrangement. ASU
2009-14
excludes tangible products containing software components and
non-software components that function together to deliver the
products essential functionality from the scope of
Subtopic
985-605,
Revenue Recognition. ASU
2009-13 and
ASU 2009-14
are effective for fiscal periods beginning on or after
June 15, 2010, which for us is the first quarter of fiscal
2011. We are currently evaluating the impact that ASU
2009-13 and
ASU 2009-14
will have on our consolidated financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Disclosure
About Foreign Currency Risk
Although the majority of our transactions are in
U.S. dollars, some transactions are based in various
foreign currencies. We purchase short-term, foreign exchange
contracts to hedge the impact of foreign currency exchange
fluctuations on certain underlying assets, revenue, liabilities
and commitments for operating expenses and product costs
denominated in foreign currencies. The purpose of entering into
these hedge transactions is to minimize the impact of foreign
currency fluctuations on our results of operations. The contract
maturity dates do not exceed 12 months. We do not purchase
forward exchange contracts for trading purposes. Currently, we
focus on hedging our foreign currency risk related to the Thai
Baht, Malaysian Ringgit, Euro and British Pound Sterling.
Malaysian Ringgit contracts are designated as cash flow hedges.
Euro and British Pound Sterling contracts are designated as fair
value hedges. Thai Baht contracts are designated as either cash
flow or fair value hedges. See Part II, Item 8,
Notes 1 and 11 in the Notes to Consolidated Financial
Statements, included in this Annual Report on
Form 10-K.
As of July 2, 2010, we had outstanding the following
purchased foreign exchange contracts (in millions, except
weighted average contract rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
Weighted Average
|
|
|
Unrealized
|
|
|
|
Amount
|
|
|
Contract Rate*
|
|
|
Gain
|
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thai Baht cash flow hedges
|
|
$
|
789
|
|
|
|
32.78
|
|
|
$
|
5
|
|
Thai Baht fair value hedges
|
|
$
|
66
|
|
|
|
32.43
|
|
|
|
|
|
Malaysian Ringgit cash flow hedges
|
|
$
|
265
|
|
|
|
3.36
|
|
|
|
6
|
|
Euro fair value hedges
|
|
$
|
8
|
|
|
|
0.80
|
|
|
|
|
|
British Pound Sterling fair value hedges
|
|
$
|
6
|
|
|
|
0.66
|
|
|
|
|
|
|
|
|
* |
|
Expressed in units of foreign currency per U.S. dollar. |
In 2010, 2009 and 2008, total net realized transaction and
foreign exchange contract currency gains and losses were not
material to our consolidated financial statements.
Disclosure
About Other Market Risks
Variable
Interest Rate Risk
Borrowings under the Credit Facility bear interest at a rate
equal to, at the option of WDTI, either (a) a LIBOR rate
determined by reference to the cost of funds for Eurodollar
deposits for the interest period relevant to such borrowing,
adjusted for certain additional costs (the Eurocurrency
Rate); or (b) a base rate determined by reference to
the higher of (i) the federal funds rate plus 0.50% and
(ii) the prime rate as announced by JPMorgan Chase Bank,
N.A. (the Base Rate); in each case plus an
applicable margin. The applicable margin for borrowings under
the term loan facility ranges from 1.25% to 1.50% with respect
to borrowings at the Eurocurrency Rate and 0.0% to 0.125% with
respect to borrowings at the Base Rate. The applicable margins
for borrowings under the Credit Facility are determined based
upon a leverage ratio of the Company and its subsidiaries
calculated on a consolidated basis. If the federal funds rate,
prime rate or LIBOR rate increases, our interest payments could
also increase. A one percent increase in the variable rate of
interest on the Credit Facility would increase interest expense
by approximately $4 million annually.
48
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Index to
Financial Statements and Financial Statement Schedule
|
|
|
|
|
|
|
Page
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
50
|
|
|
|
|
52
|
|
|
|
|
53
|
|
|
|
|
54
|
|
|
|
|
55
|
|
|
|
|
56
|
|
Financial Statement Schedule:
|
|
|
|
|
|
|
|
81
|
|
49
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Western Digital Corporation:
We have audited the accompanying consolidated balance sheets of
Western Digital Corporation and subsidiaries as of July 2,
2010 and July 3, 2009, and the related consolidated
statements of income, shareholders equity and
comprehensive income, and cash flows for each of the years in
the three-year period ended July 2, 2010. In connection
with our audits of the consolidated financial statements, we
have also audited the related financial statement schedule.
These consolidated financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Western Digital Corporation and subsidiaries as of
July 2, 2010 and July 3, 2009, and the results of
their operations and their cash flows for each of the years in
the three-year period ended July 2, 2010, in conformity
with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Western Digital Corporation and subsidiaries internal
control over financial reporting as of July 2, 2010, based
on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated August 13, 2010, expressed an unqualified opinion on
the effectiveness of the Companys internal control over
financial reporting.
August 13, 2010
Irvine, California
50
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Western Digital Corporation:
We have audited Western Digital Corporation and
subsidiaries internal control over financial reporting as
of July 2, 2010, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting appearing under Item 9A. Our
responsibility is to express an opinion on the Companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Western Digital Corporation and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of July 2, 2010, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Western Digital Corporation and
subsidiaries as of July 2, 2010 and July 3, 2009, the
related consolidated statements of income, shareholders
equity and comprehensive income, and cash flows for each of the
years in the three-year period ended July 2, 2010, and the
related financial statement schedule, and our report dated
August 13, 2010, expressed an unqualified opinion on those
consolidated financial statements and financial statement
schedule.
August 13, 2010
Irvine, California
51
WESTERN
DIGITAL CORPORATION
(in
millions, except par value)
|
|
|
|
|
|
|
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,734
|
|
|
$
|
1,794
|
|
Accounts receivable, net
|
|
|
1,256
|
|
|
|
926
|
|
Inventories
|
|
|
560
|
|
|
|
376
|
|
Other current assets
|
|
|
170
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,720
|
|
|
|
3,230
|
|
Property and equipment, net
|
|
|
2,159
|
|
|
|
1,584
|
|
Goodwill
|
|
|
146
|
|
|
|
139
|
|
Other intangible assets, net
|
|
|
88
|
|
|
|
89
|
|
Other non-current assets
|
|
|
215
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,328
|
|
|
$
|
5,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,507
|
|
|
$
|
1,101
|
|
Accrued expenses
|
|
|
281
|
|
|
|
247
|
|
Accrued warranty
|
|
|
129
|
|
|
|
95
|
|
Current portion of long-term debt
|
|
|
106
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,023
|
|
|
|
1,525
|
|
Long-term debt
|
|
|
294
|
|
|
|
400
|
|
Other liabilities
|
|
|
302
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,619
|
|
|
|
2,099
|
|
Commitments and contingencies (Notes 4 and 5)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; authorized
5 shares; issued and outstanding None
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value; authorized
450 shares; issued and outstanding 231 and
225 shares, respectively
|
|
|
2
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
1,022
|
|
|
|
896
|
|
Accumulated other comprehensive income
|
|
|
11
|
|
|
|
2
|
|
Retained earnings
|
|
|
3,674
|
|
|
|
2,292
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
4,709
|
|
|
|
3,192
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
7,328
|
|
|
$
|
5,291
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
52
WESTERN
DIGITAL CORPORATION
(in
millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
June 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenue, net
|
|
$
|
9,850
|
|
|
$
|
7,453
|
|
|
$
|
8,074
|
|
Cost of revenue
|
|
|
7,449
|
|
|
|
6,116
|
|
|
|
6,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
2,401
|
|
|
|
1,337
|
|
|
|
1,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
611
|
|
|
|
509
|
|
|
|
464
|
|
Selling, general and administrative
|
|
|
265
|
|
|
|
201
|
|
|
|
220
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
14
|
|
|
|
49
|
|
Restructuring and other, net
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
876
|
|
|
|
818
|
|
|
|
733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,525
|
|
|
|
519
|
|
|
|
1,006
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4
|
|
|
|
9
|
|
|
|
27
|
|
Interest and other expense
|
|
|
(9
|
)
|
|
|
(27
|
)
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(5
|
)
|
|
|
(18
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,520
|
|
|
|
501
|
|
|
|
981
|
|
Income tax provision
|
|
|
138
|
|
|
|
31
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,382
|
|
|
$
|
470
|
|
|
$
|
867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
6.06
|
|
|
$
|
2.12
|
|
|
$
|
3.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
5.93
|
|
|
$
|
2.08
|
|
|
$
|
3.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
228
|
|
|
|
222
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
233
|
|
|
|
226
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
53
WESTERN
DIGITAL CORPORATION
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
June 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,382
|
|
|
$
|
470
|
|
|
$
|
867
|
|
Adjustments to reconcile net income to net cash provided by
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
510
|
|
|
|
479
|
|
|
|
413
|
|
Stock-based compensation
|
|
|
60
|
|
|
|
47
|
|
|
|
37
|
|
Deferred income taxes
|
|
|
27
|
|
|
|
24
|
|
|
|
(2
|
)
|
Loss on investments
|
|
|
|
|
|
|
10
|
|
|
|
13
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
14
|
|
|
|
49
|
|
Non-cash portion of restructuring and other, net
|
|
|
|
|
|
|
63
|
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(330
|
)
|
|
|
92
|
|
|
|
(194
|
)
|
Inventories
|
|
|
(148
|
)
|
|
|
88
|
|
|
|
8
|
|
Accounts payable
|
|
|
270
|
|
|
|
(33
|
)
|
|
|
114
|
|
Accrued expenses
|
|
|
67
|
|
|
|
23
|
|
|
|
38
|
|
Other assets and liabilities
|
|
|
104
|
|
|
|
28
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,942
|
|
|
|
1,305
|
|
|
|
1,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(737
|
)
|
|
|
(519
|
)
|
|
|
(615
|
)
|
Proceeds from the sale of property and equipment
|
|
|
|
|
|
|
29
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(253
|
)
|
|
|
(63
|
)
|
|
|
(927
|
)
|
Purchases of investments
|
|
|
|
|
|
|
|
|
|
|
(105
|
)
|
Sales and maturities of investments
|
|
|
4
|
|
|
|
2
|
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(986
|
)
|
|
|
(551
|
)
|
|
|
(1,321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock under employee stock plans
|
|
|
79
|
|
|
|
28
|
|
|
|
65
|
|
Taxes paid on vested stock awards under employee stock plans
|
|
|
(17
|
)
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Increase (decrease) in excess tax benefits from employee stock
plans
|
|
|
4
|
|
|
|
(24
|
)
|
|
|
89
|
|
Repurchases of common stock
|
|
|
|
|
|
|
(36
|
)
|
|
|
(60
|
)
|
Repayment of acquired convertible debentures
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
Proceeds from debt
|
|
|
|
|
|
|
|
|
|
|
1,510
|
|
Repayment of debt
|
|
|
(82
|
)
|
|
|
(27
|
)
|
|
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(16
|
)
|
|
|
(64
|
)
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
940
|
|
|
|
690
|
|
|
|
404
|
|
Cash and cash equivalents, beginning of year
|
|
|
1,794
|
|
|
|
1,104
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
2,734
|
|
|
$
|
1,794
|
|
|
$
|
1,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
7
|
|
|
$
|
11
|
|
|
$
|
11
|
|
Cash paid for interest
|
|
$
|
8
|
|
|
$
|
14
|
|
|
$
|
33
|
|
Supplemental disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired convertible debentures
|
|
|
|
|
|
|
|
|
|
$
|
248
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
54
WESTERN
DIGITAL CORPORATION
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Accumulated Other
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Shareholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Equity
|
|
|
Income
|
|
|
Balance at June 29, 2007
|
|
|
225
|
|
|
$
|
2
|
|
|
|
(3
|
)
|
|
$
|
(51
|
)
|
|
$
|
811
|
|
|
$
|
(1
|
)
|
|
$
|
955
|
|
|
$
|
1,716
|
|
|
|
|
|
Employee stock plans
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
89
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
Increase in excess tax benefits from employee stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
867
|
|
|
|
867
|
|
|
$
|
867
|
|
Unrealized loss on foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
(11
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 27, 2008
|
|
|
225
|
|
|
$
|
2
|
|
|
|
(1
|
)
|
|
$
|
(22
|
)
|
|
$
|
906
|
|
|
$
|
(12
|
)
|
|
$
|
1,822
|
|
|
$
|
2,696
|
|
|
$
|
856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock plans
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
58
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
Decrease in excess tax benefits from employee stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
470
|
|
|
|
470
|
|
|
$
|
470
|
|
Unrealized gain on foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
14
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 3, 2009
|
|
|
225
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
$
|
896
|
|
|
$
|
2
|
|
|
$
|
2,292
|
|
|
$
|
3,192
|
|
|
$
|
484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock plans
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
Increase in excess tax benefits from employee stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,382
|
|
|
|
1,382
|
|
|
$
|
1,382
|
|
Unrealized gain on foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 2, 2010
|
|
|
231
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
$
|
1,022
|
|
|
$
|
11
|
|
|
$
|
3,674
|
|
|
$
|
4,709
|
|
|
$
|
1,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
55
WESTERN
DIGITAL CORPORATION
|
|
Note 1.
|
Organization
and Summary of Significant Accounting Policies
|
Western Digital Corporation (the Company or
Western Digital or WD) designs,
develops, manufactures and sells hard drives. A hard drive is a
device that stores data on one or more rotating magnetic disks
(magnetic media) to allow fast access to data. The
Company sells its products worldwide to original equipment
manufacturers (OEMs) and original design
manufacturers for use in computer systems, subsystems or
consumer electronics (CE) devices, and to
distributors, resellers and retailers. The Companys hard
drives are used in desktop computers, notebook computers,
external storage appliances, enterprise applications, such as
servers, workstations, network attached storage, storage area
networks and video surveillance equipment, and CE applications,
such as digital video recorders and satellite and cable set-top
boxes.
The Company also designs, develops, manufactures and sells
solid-state drives and media players. A solid-state drive is a
storage device that uses semiconductor, non-volatile media,
rather than magnetic media and magnetic heads, to store and
allow fast access to data. The Company sells its solid-state
drives worldwide to OEMs and distributors for use in the
embedded systems and client PC markets. A media player is a
device that connects to a users television, the Internet
or home theater system and plays digital movies, music and
photos from any of the Companys
WD®-branded
external hard drives, other USB mass storage devices or content
services accessed over the Internet. The Company sells its media
players worldwide to resellers and retailers under the
WD®
brand.
The Company has prepared its consolidated financial statements
in accordance with accounting principles generally accepted in
the United States (U.S. GAAP) and has adopted
accounting policies and practices which are generally accepted
in the industry in which it operates. The Companys
significant accounting policies are summarized below.
Fiscal
Year
The Company has a 52 or 53-week fiscal year. The 2010 fiscal
year which ended on July 2, 2010 consisted of
52 weeks. The 2009 and 2008 fiscal years, which ended on
July 3, 2009 and June 27, 2008, respectively,
consisted of 53 and 52 weeks each, respectively.
Basis of
Presentation
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The accounts of foreign subsidiaries have been
remeasured using the U.S. dollar as the functional
currency. As such, gains or losses resulting from remeasurement
of these accounts from local currencies into U.S. dollars
are reflected in the results of operations. These gains and
losses were immaterial to the consolidated financial statements.
On June 30, 2010, the Company acquired the magnetic media
sputtering operations of Hoya Corporation and Hoya Magnetics
Singapore Pte. Ltd (Hoya). On March 27, 2009,
the Company acquired SiliconSystems, Inc.
(SiliconSystems) and on September 5, 2007, the
Company acquired Komag, Incorporated (Komag). The
acquisitions are further described in Note 14. The results
of operations of Hoya, SiliconSystems, and Komag since the dates
of their acquisitions are included in the consolidated financial
statements.
Cash and
Cash Equivalents
The Companys cash equivalents represent highly liquid
investments in money market funds which are invested in
U.S. Treasury securities, U.S. Treasury bills and
U.S. Government agency securities with original maturities
when purchased of three months or less.
56
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investments
The Companys investments consist of auction-rate
securities, which are primarily backed by insurance products
with original maturities greater than three months. The Company
has classified these investments as
available-for-sale
securities and they are carried at fair value within other
non-current assets in the consolidated balance sheets.
Fair
Value of Financial Instruments
The carrying amounts of cash equivalents, accounts receivable,
investments, accounts payable and accrued expenses approximate
fair value for all periods presented because of the short-term
maturity of these assets and liabilities or, in the case of
investments, these are recorded using appropriate market
information. The carrying amount of debt approximates fair value
because of its variable interest rate.
Concentration
of Credit Risk
The Company sells its products to computer manufacturers,
resellers and retailers throughout the world. The Company
performs ongoing credit evaluations of its customers
financial condition and generally requires no collateral. The
Company maintains allowances for potential credit losses, and
such losses have historically been within managements
expectations. At any given point in time, the total amount
outstanding from any one of a number of its customers may be
individually significant to the Companys financial
results. At July 2, 2010 and July 3, 2009, the Company
had reserves for potential credit losses of $6 million and
$14 million, respectively, and net accounts receivable of
$1.3 billion and $926 million, respectively. The
Company also has cash equivalent and investment policies that
limit the amount of credit exposure to any one financial
institution or investment instrument and requires that
investments be made only with financial institutions or in
investment instruments evaluated as highly credit-worthy.
Inventory
The Company values inventory at the lower of cost
(first-in,
first out and weighted average methods) or net realizable value.
The
first-in,
first-out (FIFO) method is used to value the cost of
the majority of the Companys inventories, while the
weighted-average method is used to value precious metal
inventories. Weighted-average cost is calculated based upon the
cost of precious metals at the time they are received by the
Company. The Company has determined that it is not practicable
to assign specific costs to individual units of precious metals
and, as such, precious metals are relieved from inventory based
on the weighted-average cost of the inventory at the time the
inventory is used in production. The weighted average method of
valuing precious metals does not materially differ from a
first-in,
first-out method. As of July 2, 2010 and July 3, 2009,
82% of the inventory was valued using the FIFO method with the
remainder valued using the weighted average method. Inventory
write-downs are recorded for the valuation of inventory at the
lower of cost or net realizable value by analyzing market
conditions and estimates of future sales prices as compared to
inventory costs and inventory balances.
The Company evaluates inventory balances for excess quantities
and obsolescence on a regular basis by analyzing estimated
demand, inventory on hand, sales levels and other information,
and reduces inventory balances to net realizable value for
excess and obsolete inventory based on this analysis.
Unanticipated changes in technology or customer demand could
result in a decrease in demand for one or more of the
Companys products, which may require a write down of
inventory that could materially affect operating results.
Property
and Equipment
The cost of property and equipment is depreciated over the
estimated useful lives of the respective assets. The
Companys buildings are being depreciated over periods
ranging from fifteen to thirty years. The majority of the
Companys equipment is being depreciated over periods of
three to seven years. Depreciation is computed on a
straight-line basis. Leasehold improvements are amortized over
the lesser of the estimated useful lives of the assets or the
related lease terms.
57
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill
and Other Long-Lived Assets
The total purchase price in a business combination is allocated
to the fair value of assets acquired and liabilities assumed
based on their fair values at the acquisition date, with amounts
exceeding the fair values being recorded as goodwill. Goodwill
is not amortized. Instead, it is tested for impairment on an
annual basis or more frequently whenever events or changes in
circumstances indicate that goodwill may be impaired. The
Company did not record any impairment of goodwill during 2010,
2009 or 2008.
Other intangible assets consist primarily of technology acquired
in business combinations. Acquired intangibles are amortized on
a straight-line basis over their respective estimated useful
lives. Long-lived assets are tested for recoverability whenever
events or changes in circumstances indicate that their carrying
amounts may not be recoverable. The Company did not record any
impairments to long-lived assets during 2010 or 2008. The
Company recorded impairments to certain long-lived assets during
2009. See Note 13.
Revenue
and Accounts Receivable
Revenue is recognized when the title and risk of loss have
passed to the customer, there is persuasive evidence of an
arrangement, delivery has occurred, or services have been
rendered, the sales price is fixed or determinable and
collectability is reasonably assured. The Company establishes
provisions against revenue and cost of revenue for estimated
sales returns in the same period that the related revenue is
recognized based on existing product return notifications. If
actual sales returns exceed expectations, an increase in the
sales return accrual would be required, which could materially
affect operating results.
In accordance with standard industry practice, the Company
provides distributors and retailers (collectively referred to as
resellers) with limited price protection for
inventories held by resellers at the time of published list
price reductions, and the Company provides resellers and OEMs
with other sales incentive programs. At the time the Company
recognizes revenue to resellers and OEMs, a reduction of revenue
is recorded for estimated price protection until the resellers
sell such inventory to their customers and the Company also
records a reduction of revenue for the other programs in effect.
The Company bases these adjustments on several factors,
including anticipated price decreases during the reseller
holding period, resellers sell-through and inventory
levels, estimated amounts to be reimbursed to qualifying
customers, historical pricing information and customer claim
processing. If customer demand for hard drives or market
conditions differ from the Companys expectations, the
Companys operating results could be materially affected.
The Company also has programs under which it reimburses
qualified distributors and retailers for certain marketing
expenditures which are recorded as a reduction of revenue. Sales
incentive and marketing programs are recorded as a reduction of
revenue.
The Company records an allowance for doubtful accounts by
analyzing specific customer accounts and assessing the risk of
loss based on insolvency, disputes or other collection issues.
In addition, the Company routinely analyzes the different
receivable aging categories and establishes reserves based on a
combination of past due receivables and expected future losses
based primarily on its historical levels of bad debt losses. If
the financial condition of a significant customer deteriorates
resulting in its inability to pay its accounts when due, or if
the Companys overall loss history changes significantly,
an adjustment in the Companys allowance for doubtful
accounts would be required, which could materially affect
operating results.
The Company establishes provisions against revenue and cost of
revenue for sales returns in the same period that the related
revenue is recognized. These provisions are based on existing
product return notifications. If actual sales returns exceed
expectations, an increase in the sales return accrual would be
required, which could negatively affect operating results.
Warranty
The Company records an accrual for estimated warranty costs when
revenue is recognized. The Company generally warrants its
products for a period of one to five years. The warranty
provision considers estimated product failure rates
58
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and trends, estimated repair or replacement costs and estimated
costs for customer compensatory claims related to product
quality issues, if any. A statistical warranty tracking model is
used to help prepare estimates and assist the Company in
exercising judgment in determining the underlying estimates. The
statistical tracking model captures specific detail on hard
drive reliability, such as factory test data, historical field
return rates, and costs to repair by product type.
Managements judgment is subject to a greater degree of
subjectivity with respect to newly introduced products because
of limited field experience with those products upon which to
base warranty estimates. Management reviews the warranty accrual
quarterly for products shipped in prior periods and which are
still under warranty. Any changes in the estimates underlying
the accrual may materially affect operating results. Such
changes are generally a result of differences between forecasted
and actual return rate experience and costs to repair. If actual
product return trends, costs to repair returned products or
costs of customer compensatory claims differ significantly from
estimates, future results of operations could be materially
affected.
Litigation
and Other Contingencies
The Company discloses material contingencies deemed to be
reasonably possible and accrues loss contingencies when, in
consultation with legal advisors, the Company concludes that a
loss is probable and reasonably estimable. The ability to
predict the ultimate outcome of such matters involves judgments,
estimates and inherent uncertainties. The actual outcome of such
matters could differ materially from managements
estimates. See Note 5.
Advertising
Expense
Advertising costs are expensed as incurred. Selling, general and
administrative expenses of the Company included advertising
costs of $7 million, $5 million, and $3 million
in 2010, 2009 and 2008, respectively.
Income
Taxes
The Company accounts for income taxes under the asset and
liability method, which provides that deferred tax assets and
liabilities be recognized for temporary differences between the
financial reporting basis and the tax basis of assets and
liabilities and expected benefits of utilizing net operating
loss (NOL) and tax credit carryforwards. The Company
records a valuation allowance when it is more likely than not
that the deferred tax assets will not be realized. Each period,
the Company evaluates the need for a valuation allowance for its
deferred tax assets and adjusts the valuation allowance so that
the Company records net deferred tax assets only to the extent
that it has concluded it is more likely than not that these
deferred tax assets will be realized.
The Company recognizes liabilities for uncertain tax positions
based on a two-step process. To the extent a tax position does
not meet a more-likely-than-not level of certainty, no benefit
is recognized in the financial statements. If a position meets
the more-likely-than-not level of certainty, it is recognized in
the financial statements at the largest amount that has a
greater than 50% likelihood of being realized upon ultimate
settlement. Interest and penalties related to unrecognized tax
benefits are recognized on liabilities recorded for uncertain
tax positions and are recorded in the provision for income
taxes. The actual liability for unrealized tax benefit in any
such contingency may be materially different from the
Companys estimates, which could result in the need to
record additional liabilities for unrecognized tax benefits or
potentially adjust previously recorded liabilities for
unrealized tax benefits and materially affect our operating
results.
Income
per Common Share
The Company computes basic income per common share using net
income and the weighted average number of common shares
outstanding during the period. Diluted income per common share
is computed using net income and the weighted average number of
common shares and potentially dilutive common shares outstanding
during the period. Potentially dilutive common shares include
certain dilutive outstanding employee stock options, rights to
purchase shares of common stock under the Companys
Employee Stock Purchase Plan (ESPP) and restricted
stock unit awards.
59
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table illustrates the computation of basic and
diluted income per common share (in millions, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
June 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income
|
|
$
|
1,382
|
|
|
$
|
470
|
|
|
$
|
867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
228
|
|
|
|
222
|
|
|
|
221
|
|
Employee stock options and other
|
|
|
5
|
|
|
|
4
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
233
|
|
|
|
226
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
6.06
|
|
|
$
|
2.12
|
|
|
$
|
3.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
5.93
|
|
|
$
|
2.08
|
|
|
$
|
3.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive potential common shares excluded*
|
|
|
1
|
|
|
|
6
|
|
|
|
1
|
|
|
|
|
* |
|
For purposes of computing diluted income per common share,
certain potentially dilutive securities have been excluded from
the calculation because their effect would have been
anti-dilutive. |
Stock-Based
Compensation
Stock-based compensation cost is measured at the grant date
based on the value of the award and is recognized as expense
over the vesting period. The fair values of all stock options
granted are estimated using a binomial model, and the fair
values of all ESPP purchase rights are estimated using the
Black-Scholes-Merton option-pricing model. Both the binomial and
the Black-Scholes-Merton models require the input of highly
subjective assumptions. The Company is required to use judgment
in estimating the amount of stock-based awards that are expected
to be forfeited. If actual forfeitures differ significantly from
the original estimate, stock-based compensation expense and the
results of operations could be materially affected.
Other
Comprehensive Income (Loss)
Other comprehensive income (loss) refers to revenue, expenses,
gains and losses that are recorded as an element of
shareholders equity but are excluded from net income. The
Companys other comprehensive income (loss) is comprised of
unrealized gains and losses on foreign exchange contracts.
Foreign
Exchange Contracts
Although the majority of the Companys transactions are in
U.S. dollars, some transactions are based in various
foreign currencies. The Company purchases short-term, foreign
exchange contracts to hedge the impact of foreign currency
exchange fluctuations on certain underlying assets, revenue,
liabilities and commitments for operating expenses and product
costs denominated in foreign currencies. The purpose of entering
into these hedging transactions is to minimize the impact of
foreign currency fluctuations on the Companys results of
operations. These contract maturity dates do not exceed
12 months. All forward exchange contracts are for risk
management purposes only. The Company does not purchase forward
exchange contracts for trading purposes.
The Company had outstanding forward exchange contracts with
commercial banks for Thai Baht, Malaysian Ringgit, Euro and
British Pound Sterling with aggregate notional amounts of
$1.1 billion and $583 million at July 2, 2010 and
July 3, 2009, respectively. Malaysian Ringgit contracts are
designated as cash flow hedges. Euro and British
60
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pound Sterling contracts are designated as fair value hedges.
Thai Baht contracts are designated as either cash flow or fair
value hedges.
If the derivative is designated as a cash flow hedge, the
effective portion of the change in fair value of the derivative
is initially deferred in other comprehensive income (loss), net
of tax. These amounts are subsequently recognized into earnings
when the underlying cash flow being hedged is recognized into
earnings. Recognized gains and losses on foreign exchange
contracts entered into for manufacturing related activities are
reported in cost of revenues. Hedge effectiveness is measured by
comparing the hedging instruments cumulative change in
fair value from inception to maturity to the underlying
exposures terminal value. The Company determined the
ineffectiveness associated with its cash flow hedges to be
immaterial.
A change in the fair value of fair value hedges is recognized in
earnings in the period incurred and is reported as a component
of operating expenses. All fair value hedges were determined to
be effective. The fair value and the changes in fair value on
these contracts were not material to the consolidated financial
statements for all years presented. See Notes 10 and 11 for
additional disclosures related to foreign exchange contracts.
Use of
Estimates
Company management has made estimates and assumptions relating
to the reporting of certain assets and liabilities in conformity
with U.S. GAAP. These estimates and assumptions have been
applied using methodologies which are consistent throughout the
periods presented. However, actual results could differ
materially from these estimates.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued Accounting Standard Codification
(ASC) 820, Fair Value Measurements and
Disclosures (ASC 820), which establishes a
framework for measuring fair value under U.S. GAAP and
expands disclosures about fair value measurement. In February
2008, FASB issued
ASC 820-10-65-1,
Fair Value Measurements and Disclosures
Transition and Open Effective Date Information, which
delayed the effective date of ASC 820 for all non-financial
assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial
statements on a recurring basis, until fiscal years beginning
after November 15, 2008 and interim periods within those
years, which for the Company was the first quarter of fiscal
2010. The Companys adoption of the provisions of
ASC 820 for non-financial assets and non-financial
liabilities in the first quarter of fiscal 2010 had no impact on
its consolidated financial statements.
In December 2007, the FASB issued ASC 805, Business
Combinations (ASC 805). ASC 805
establishes principles and requirements for how the acquirer of
a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree. ASC 805 also
provides guidance for recognizing and measuring the goodwill
acquired in the business combination or a gain from a bargain
purchase and determines what information to disclose to enable
users of financial statements to evaluate the nature and
financial effects of the business combination. ASC 805
applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008, which for the Company was the first quarter of fiscal
2010. ASC 805 impacted the Companys consolidated
financial statements for business combinations with an
acquisition date on or after adoption in the first quarter of
fiscal 2010. For business combinations in which the acquisition
date was before the adoption date, the provision of ASC 805
requires changes in the amount of income tax uncertainties to be
recognized in earnings rather than as an adjustment to the
accounting for prior business combinations. The Companys
adoption of ASC 805 in the first quarter of fiscal 2010 did
not have a material impact on its consolidated financial
statements.
In April 2008, the FASB issued
ASC 350-30-65-1,
General Intangibles Other than Goodwill
Transition and Open Effective Date Information (ASC
350-30-65-1),
which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under ASC 350,
Intangibles Goodwill and Other.
ASC 350-30-65-1
is effective for fiscal years beginning on or after
61
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 15, 2008, which for the Company was the first
quarter of fiscal 2010. The Companys adoption of
ASC 350-30-65-1
in the first quarter of fiscal 2010 had no impact on its
consolidated financial statements.
In September 2009, the FASB issued Accounting Standards Update
(ASU)
2009-13,
Multiple-Deliverable Revenue Arrangements (ASU
2009-13),
and ASU
2009-14,
Certain Revenue Arrangements That Include Software
Elements (ASU
2009-14).
ASU 2009-13
amends the revenue guidance under Subtopic
605-25,
Multiple Element Arrangements, and addresses how to
determine whether an arrangement involving multiple deliverables
contains more than one unit of accounting and how arrangement
consideration shall be measured and allocated to the separate
units of accounting in the arrangement. ASU
2009-14
excludes tangible products containing software components and
non-software components that function together to deliver the
products essential functionality from the scope of
Subtopic
985-605,
Revenue Recognition. ASU
2009-13 and
ASU 2009-14
are effective for fiscal periods beginning on or after
June 15, 2010, which for the Company is the first quarter
of fiscal 2011. The Company is currently evaluating the impact
that ASU
2009-13 and
ASU 2009-14
will have on its consolidated financial statements.
|
|
Note 2.
|
Supplemental
Financial Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials and component parts
|
|
$
|
159
|
|
|
$
|
97
|
|
Work-in-process
|
|
|
255
|
|
|
|
154
|
|
Finished goods
|
|
|
146
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
560
|
|
|
$
|
376
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
Land and buildings
|
|
$
|
675
|
|
|
$
|
522
|
|
Machinery and equipment
|
|
|
3,470
|
|
|
|
2,533
|
|
Machinery and equipment recorded under capital leases
|
|
|
|
|
|
|
58
|
|
Furniture and fixtures
|
|
|
9
|
|
|
|
9
|
|
Leasehold improvements
|
|
|
69
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
4,223
|
|
|
|
3,175
|
|
Accumulated depreciation and amortization
|
|
|
(2,064
|
)
|
|
|
(1,591
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
2,159
|
|
|
$
|
1,584
|
|
|
|
|
|
|
|
|
|
|
Long-term debt consisted of the following as of July 2,
2010 and July 3, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Term loan
|
|
$
|
400
|
|
|
$
|
481
|
|
Capital lease obligations
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
400
|
|
|
|
482
|
|
Less amounts due in one year
|
|
|
(106
|
)
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
294
|
|
|
$
|
400
|
|
|
|
|
|
|
|
|
|
|
62
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Credit
Facility
In February 2008, Western Digital Technologies, Inc.
(WDTI), a wholly-owned subsidiary of the Company,
entered into a five-year Credit Agreement that provided for a
$750 million unsecured loan consisting of a
$500 million term loan facility (Term Loan) and
a $250 million revolving credit facility. The Company
voluntarily terminated the $250 million revolving credit
facility during its fourth fiscal quarter of 2010. As of
July 2, 2010, the Term Loan had a variable interest rate of
1.63% and a remaining balance of $400 million, which
requires principal payments totaling $106 million in 2011,
$144 million in 2012 and $150 million in 2013. The
Term Loan has a maturity date of February 11, 2013. The
Credit Facility requires WDTI to comply with a leverage ratio
and an interest coverage ratio calculated on a consolidated
basis for the Company and its subsidiaries. In addition, the
Credit Facility contains customary covenants, including
covenants that limit or restrict WDTIs and its
subsidiaries ability to incur liens, incur indebtedness,
make certain restricted payments, merge or consolidate and enter
into certain speculative hedging arrangements. As of
July 2, 2010, WDTI was in compliance with all covenants.
|
|
Note 4.
|
Commitments
and Contingencies
|
Lease
Commitments
The Company leases certain facilities and equipment under
long-term, non-cancelable operating leases. The Companys
operating leases consist of leased property that expire at
various dates through 2020. Rental expense under these operating
leases, including
month-to-month
rentals, was $22 million, $21 million and
$18 million in 2010, 2009 and 2008, respectively. Future
minimum lease payments under operating leases that have initial
or remaining non-cancelable lease terms in excess of one year at
July 2, 2010 are as follows (in millions):
|
|
|
|
|
2011
|
|
$
|
15
|
|
2012
|
|
|
13
|
|
2013
|
|
|
14
|
|
2014
|
|
|
12
|
|
2015
|
|
|
10
|
|
Thereafter
|
|
|
35
|
|
|
|
|
|
|
Total future minimum payments
|
|
$
|
99
|
|
|
|
|
|
|
Product
Warranty Liability
Changes in the warranty accrual for 2010, 2009 and 2008 were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Warranty accrual, beginning of period
|
|
$
|
123
|
|
|
$
|
114
|
|
|
$
|
90
|
|
Charges to operations
|
|
|
183
|
|
|
|
126
|
|
|
|
106
|
|
Utilization
|
|
|
(138
|
)
|
|
|
(111
|
)
|
|
|
(73
|
)
|
Changes in estimate related to pre-existing warranties
|
|
|
2
|
|
|
|
(6
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty accrual, end of period
|
|
$
|
170
|
|
|
$
|
123
|
|
|
$
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued warranty also includes amounts classified in non-current
other liabilities of $41 million at July 2, 2010 and
$28 million at July 3, 2009.
63
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term
Purchase Agreements
The Company has entered into long-term purchase agreements with
various component suppliers. The commitments depend on specific
products ordered and may be subject to minimum quality
requirements and future price negotiations. The Company expects
these commitments to total approximately $529 million for
2011, $634 million for 2012, and approximately
$3 million a year for 2013 through 2015.
|
|
Note 5.
|
Legal
Proceedings
|
The Company discloses material loss contingencies deemed to be
reasonably possible and accrues for loss contingencies when, in
consultation with the Companys legal advisors, the Company
concludes that a loss is probable and reasonably estimable. The
ability to predict the ultimate outcome of such matters involves
judgments, estimates and inherent uncertainties. The actual
outcome of such matters could differ materially from
managements estimates.
Intellectual
Property Litigation
On December 8, 2008, plaintiffs MagSil Corporation and the
Massachusetts Institute of Technology filed a complaint in the
District of Delaware against the Company and seven other
companies in the disk drive industry alleging infringement of
U.S. Patent Nos. 5,629,922 and 5,835,314. The complaint
sought unspecified monetary damages and injunctive relief. The
asserted patents allegedly relate to tunneling magneto resistive
technology. MagSil and the Company executed a Confidential
Settlement Agreement on June 22, 2010. The parties filed a
Stipulation of Dismissal in July 2010. The financial impact of
the settlement was not material to the Company.
On June 20, 2008, plaintiff Convolve, Inc.
(Convolve) filed a complaint in the Eastern District
of Texas against the Company and two other companies alleging
infringement of U.S. Patent Nos. 6,314,473 and 4,916,635.
Plaintiff is seeking unspecified monetary damages and injunctive
relief. On October 10, 2008, Convolve amended its complaint
to allege infringement of only the 473 patent. The
473 patent allegedly relates to interface technology to
select between certain modes of a disk drives operations
relating to speed and noise. The Company intends to defend
itself vigorously in this matter.
On April 7, 2009, plaintiff Gregory Bender filed a
complaint in the Northern District of California against the
Company and Seagate Technology LLC alleging infringement of
U.S. Patent No. 5,103,188. Plaintiff is seeking
unspecified monetary damages. The asserted patent allegedly
relates to buffered transconductance amplifier technology. The
Company intends to defend itself vigorously in this matter.
On July 15, 2009, plaintiffs Carl B. Collins and Farzin
Davanloo filed a complaint in the Eastern District of Texas
against the Company and ten other companies alleging
infringement of U.S. Patent Nos. 5,411,797 and 5,478,650.
Plaintiffs are seeking injunctive relief and unspecified
monetary damages, fees, and costs. The asserted patents
allegedly relate to nanophase diamond films. The Company intends
to defend itself vigorously in this matter.
On December 7, 2009, plaintiff Nazomi Communications filed
a complaint in the Eastern District of Texas against the Company
and seven other companies alleging infringement of
U.S. Patent Nos. 7,080,362 and 7,225,436. Plaintiffs are
seeking injunctive relief and unspecified monetary damages,
fees, and costs. The asserted patents allegedly relate to
processor cores capable of Java hardware acceleration. The
Company intends to defend itself vigorously in this matter.
On January 5, 2010, plaintiff Enova Technology Corporation
filed a complaint in the District of Delaware against the
Company and Initio Corporation alleging infringement of
U.S. Patent Nos. 7,136,995 and 7,386,734. Plaintiffs are
seeking injunctive relief and unspecified monetary damages,
fees, and costs. The asserted patents allegedly relate to real
time full disk encryption application specific integrated
circuits, or ASICs. The Company intends to defend itself
vigorously in this matter.
64
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Employment
Litigation
On March 20, 2009, plaintiff Ghazala H. Durrani, a former
employee of the Company, filed a putative class action complaint
in the Alameda County (California) Superior Court. The complaint
alleges that certain of the Companys engineers have been
misclassified as exempt employees under California state law and
are, therefore, due unspecified amounts for unpaid hourly
overtime wages and other amounts, as well as penalties for
allegedly missed meal and rest periods. By court order dated
April 24, 2009, the case was transferred to the Orange
County (California) Superior Court, where it is now pending. On
or about June 16, 2009, the Company was dismissed from the
case without prejudice by stipulation, leaving WDTI as the sole
remaining defendant. On or about June 4, 2009, WDTI filed
its answer to the complaint, denying the substantive allegations
thereof and raising several affirmative defenses. Formal
discovery has commenced, and the court has set October 18,
2010, as the last date for the parties to schedule a hearing on
whether the case should be certified as a class action. The
parties participated in a mediation of the case on June 3,
2010 before a former federal magistrate, which may lead to a
settlement of the case. No formal settlement agreement has been
entered into, however, and there is no assurance that settlement
will be reached. Any such settlement would require court
approval before it can become final. If the matter is settled on
the terms presently under consideration, the Company expects
that the financial impact of the settlement would not be
material to the Company. If the matter is not settled, and the
Company is unsuccessful in its defense of this matter, potential
liability could include unpaid wages, interest, penalties,
attorneys fees and costs. Absent settlement, the Company
intends to continue to defend itself vigorously in this matter.
Other
Matters
In the normal course of business, the Company is subject to
other legal proceedings, lawsuits and other claims. Although the
ultimate aggregate amount of probable monetary liability or
financial impact with respect to these other matters is subject
to many uncertainties and is therefore not predictable with
assurance, management believes that any monetary liability or
financial impact to the Company from these other matters,
individually and in the aggregate, would not be material to the
Companys financial condition, results of operations or
cash flows. However, there can be no assurance with respect to
such result, and monetary liability or financial impact to the
Company from these other matters could differ materially from
those projected.
|
|
Note 6.
|
Business
Segment, Geographic Information and Major Customers
|
Segment
Information
The Company operates in one reportable operating segment, the
hard drive business.
65
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Geographic
Information
The Companys operations outside the United States include
manufacturing facilities in Malaysia, Singapore, and Thailand as
well as sales offices throughout Asia, Canada, Europe, India,
Japan, and the Middle East. The following table summarizes the
Companys operations by geographic area for the three years
ended July 2, 2010 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenue(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,889
|
|
|
$
|
1,492
|
|
|
$
|
1,949
|
|
Asia
|
|
|
5,239
|
|
|
|
3,639
|
|
|
|
3,343
|
|
Europe, Middle East and Africa
|
|
|
2,260
|
|
|
|
2,008
|
|
|
|
2,344
|
|
Other
|
|
|
462
|
|
|
|
314
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,850
|
|
|
$
|
7,453
|
|
|
$
|
8,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,173
|
|
|
$
|
1,043
|
|
|
|
|
|
Asia
|
|
|
1,379
|
|
|
|
954
|
|
|
|
|
|
Europe, Middle East and Africa
|
|
|
56
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,608
|
|
|
$
|
2,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net revenue is attributed to geographic regions based on the
ship to location of the customer. |
Major
Customer
For 2010 and 2008, no single customer accounted for 10%, or
more, of the Companys net revenue. For 2009, sales to Dell
Inc. accounted for 10% of the Companys net revenue.
|
|
Note 7.
|
Western
Digital Corporation 401(k) Plan
|
The Company has adopted the Western Digital Corporation 401(k)
Plan (the Plan). The Plan covers substantially all
domestic employees, subject to certain eligibility requirements.
The Company makes a basic matching contribution on behalf of
each participating eligible employee equal to fifty percent
(50%) of the eligible participants pre-tax contributions
for the contribution cycle not to exceed 5% of the eligible
participants compensation; provided, however, that each
eligible participant shall receive a minimum annual basic
matching contribution equal to fifty percent (50%) of the first
$4,000 of pre-tax contributions for any calendar year. Company
contributions vest over a
5-year
period of employment. For 2010, 2009 and 2008, the Company made
Plan contributions of $9 million, $7 million, and
$4 million, respectively.
|
|
Note 8.
|
Shareholders
Equity
|
Stock
Incentive Plans
The Company maintains four stock-based incentive plans
(collectively referred to as the Stock Plans): The
amended and restated 2004 Performance Incentive Plan, the
Employee Stock Option Plan, the Broad-Based Stock Incentive Plan
and the Stock Option Plan for Non-Employee Directors. No new
awards may be granted under the Employee Stock Option Plan, the
Broad-Based Stock Incentive Plan or the Stock Option Plan for
Non-Employee Directors (collectively referred to as the
Prior Stock Plans). As of July 2, 2010, options
to purchase 1.7 million shares of the Companys common
stock remain outstanding and exercisable under the Prior Stock
Plans. Options granted under the Prior Stock Plans vested over
periods from one to four years. Options granted under the Prior
Stock Plans expire
66
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
either five or ten years from the date of grant. There are no
outstanding restricted stock awards under the Prior Stock Plans.
The types of awards that may be granted under the 2004
Performance Incentive Plan include stock options, stock
appreciation rights, restricted stock, stock bonuses and other
forms of awards granted or denominated in the Companys
common stock or units of the Companys common stock, as
well as cash bonus awards. Persons eligible to receive awards
under the 2004 Performance Incentive Plan include officers or
employees of the Company or any of its subsidiaries, directors
of the Company and certain consultants and advisors to the
Company or any of its subsidiaries. The vesting of awards under
the Performance Incentive Plan is determined at the date of
grant. Each award expires on a date determined at the date of
grant; however, the maximum term of options and stock
appreciation rights under the 2004 Performance Incentive Plan is
ten years after the grant date of the award.
As of July 2, 2010, the maximum number of shares of the
Companys common stock that was authorized for award grants
under the 2004 Performance Incentive Plan was 37.2 million
shares. Any shares subject to awards under the Prior Stock Plans
that are canceled, forfeited or otherwise terminate without
having vested or been exercised, as applicable, will become
available for other award grants under the 2004 Performance
Incentive Plan. The 2004 Performance Incentive Plan will
terminate on September 20, 2014 unless terminated earlier
by the Companys Board of Directors.
Employee
Stock Purchase Plan
During 2006, the Company adopted the ESPP whereby eligible
employees may authorize payroll deductions of up to 10% of their
eligible compensation to purchase shares of the Companys
common stock at 95% of the fair market value of common stock on
either the date of grant or on the exercise date, whichever is
less. The date of grant of each offering period is
June 1st or December 1st, except for the initial
offering period, which began on December 15, 2005. Each
offering period is 24 months and consists of four exercise
dates. If the fair market value of the common stock is less on a
given exercise date than on the date of grant, employee
participation in that offering period is terminated and
re-enrollment in the new offering period occurs automatically.
The Companys ESPP operates in the U.S. in accordance
with Section 423 of the Internal Revenue Code.
Stock-Based
Compensation Expense
The Company charged to expense $37 million,
$24 million and $18 million for stock-based
compensation related to options issued under stock option plans
and the ESPP in 2010, 2009 and 2008, respectively. As of
July 2, 2010, total compensation cost related to unvested
stock options and ESPP rights issued to employees but not yet
recognized was $52 million and will be amortized on a
straight-line basis over a weighted average service period of
approximately 2.1 years.
The Company granted approximately 1.2 million,
0.9 million and 0.9 million restricted stock units
during 2010, 2009 and 2008, respectively, which are payable in
an equal number of shares of the Companys common stock at
the time of vesting of the units. Restricted stock unit awards
vest over periods ranging from one to five years from the date
of grant. The aggregate market value of the shares underlying
the restricted stock awards at the date of grant was
$45 million, $19 million and $23 million in 2010,
2009 and 2008, respectively. These amounts are being recognized
to expense over the corresponding vesting periods. For purposes
of valuing these awards, the Company has assumed a forfeiture
rate of 1.55% based on a historical analysis indicating
forfeitures for these types of awards. The Company charged to
expense $23 million, $23 million and $19 million
related to restricted stock and restricted stock unit awards
that vested during 2010, 2009 and 2008, respectively. As of
July 2, 2010, the aggregate unamortized fair value of all
unvested restricted stock unit awards was $51 million,
which will be recognized on a straight-line basis over a
weighted average vesting period of approximately 1.6 years.
67
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value Disclosure Binomial Model
The fair value of stock options granted during 2010, 2009 and
2008 was estimated using a binomial option-pricing model. The
binomial model requires the input of highly subjective
assumptions including the expected stock price volatility, the
expected price multiple at which employees are likely to
exercise stock options and the expected employee termination
rate. The Company uses historical data to estimate option
exercise, employee termination, and expected stock price
volatility within the binomial model. The risk-free rate for
periods within the contractual life of the option is based on
the U.S. Treasury yield curve in effect at the time of
grant. The fair value of stock options granted during the three
years ended July 2, 2010 was estimated using the following
weighted average assumptions:
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Suboptimal exercise factor
|
|
1.73
|
|
1.73
|
|
1.61
|
Range of risk-free interest rates
|
|
0.31% to 3.40%
|
|
0.38% to 3.44%
|
|
1.57% to 4.38%
|
Range of expected stock price volatility
|
|
0.40 to 0.72
|
|
0.43 to 0.77
|
|
0.33 to 0.67
|
Weighted average expected volatility
|
|
0.57
|
|
0.55
|
|
0.48
|
Post-vesting termination rate
|
|
3.57%
|
|
4.02%
|
|
5.26%
|
Dividend yield
|
|
|
|
|
|
|
Fair value
|
|
$17.09
|
|
$9.05
|
|
$9.65
|
The weighted average expected term of the Companys stock
options for 2010, 2009 and 2008 was 4.6 years,
4.9 years and 5.3 years, respectively.
Stock
Option Activity
The following table summarizes activity under the Stock Plans
(in millions, except per share amounts and remaining contractual
lives):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Intrinsic
|
|
|
|
of Shares
|
|
|
Per Share
|
|
|
(in years)
|
|
|
Value
|
|
|
Options outstanding at June 29, 2007
|
|
|
10.8
|
|
|
$
|
12.15
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2.1
|
|
|
|
25.22
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4.2
|
)
|
|
|
10.59
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(0.7
|
)
|
|
|
29.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 27, 2008
|
|
|
8.0
|
|
|
$
|
14.92
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4.2
|
|
|
|
20.02
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(0.6
|
)
|
|
|
9.59
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(0.3
|
)
|
|
|
20.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at July 3, 2009
|
|
|
11.3
|
|
|
$
|
17.00
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1.4
|
|
|
|
36.06
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3.1
|
)
|
|
|
14.67
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(0.2
|
)
|
|
|
22.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at July 2, 2010
|
|
|
9.4
|
|
|
$
|
20.61
|
|
|
|
4.9
|
|
|
$
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at July 2, 2010
|
|
|
4.6
|
|
|
$
|
15.71
|
|
|
|
4.2
|
|
|
$
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest after July 2, 2010
|
|
|
9.3
|
|
|
$
|
20.52
|
|
|
|
4.9
|
|
|
$
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated based on the
difference between the exercise price of the underlying options
and the quoted price of the Companys common stock for
those awards that have an exercise price below the quoted price
on the date the intrinsic value is determined. As of
July 2, 2010, the Company had options outstanding to
purchase an aggregate of 7.9 million shares with an
exercise price below the quoted price of the Companys
stock on that
68
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
date resulting in an aggregate intrinsic value of
$98 million. During 2010 and 2009, the aggregate intrinsic
value of options exercised under the Companys stock option
plans was $72 million and $8 million, respectively,
determined as of the date of exercise.
The following table summarizes information about options
outstanding and exercisable under the Stock Plans as of
July 2, 2010 (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Range of
|
|
Number
|
|
|
Contractual Life*
|
|
|
Weighted Average
|
|
|
Number
|
|
|
Weighted Average
|
|
Exercise Prices
|
|
of Shares
|
|
|
(in years)
|
|
|
Exercise Price
|
|
|
of Shares
|
|
|
Exercise Price
|
|
|
$ 2.10 13.76
|
|
|
2.1
|
|
|
|
3.1
|
|
|
$
|
8.39
|
|
|
|
2.1
|
|
|
$
|
8.38
|
|
13.95 16.85
|
|
|
1.9
|
|
|
|
5.5
|
|
|
|
16.69
|
|
|
|
0.5
|
|
|
|
16.59
|
|
16.96 23.78
|
|
|
3.0
|
|
|
|
5.1
|
|
|
|
22.42
|
|
|
|
1.6
|
|
|
|
21.85
|
|
23.97 35.75
|
|
|
2.2
|
|
|
|
5.6
|
|
|
|
31.82
|
|
|
|
0.4
|
|
|
|
26.74
|
|
37.65 40.66
|
|
|
0.2
|
|
|
|
6.3
|
|
|
|
38.75
|
|
|
|
0.0
|
|
|
|
38.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.4
|
|
|
|
4.9
|
|
|
$
|
20.61
|
|
|
|
4.6
|
|
|
$
|
15.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents the weighted average remaining contractual lives of
the options outstanding. |
Fair
Value Disclosure Black-Scholes-Merton
Model
The fair value of ESPP purchase rights issued is estimated at
the date of grant of the purchase rights using the
Black-Scholes-Merton option-pricing model. The
Black-Scholes-Merton option-pricing model was developed for use
in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. The
Black-Scholes-Merton option-pricing model requires the input of
highly subjective assumptions such as the expected stock price
volatility and the expected period until options are exercised.
Purchase rights under the current ESPP provisions are granted on
either June 1 or December 1 of each year.
The fair values of all ESPP purchase rights granted on or prior
to July 2, 2010 have been estimated at the date of grant
using a Black-Scholes-Merton option-pricing model with the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Option life (in years)
|
|
|
1.24
|
|
|
|
1.30
|
|
|
|
1.24
|
|
Risk-free interest rate
|
|
|
0.57
|
%
|
|
|
0.65
|
%
|
|
|
3.40
|
%
|
Stock price volatility
|
|
|
0.53
|
|
|
|
0.63
|
|
|
|
0.38
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
10.02
|
|
|
$
|
3.61
|
|
|
$
|
6.47
|
|
Stock
Repurchase Program
The Companys Board of Directors previously authorized the
repurchase of $750 million of common stock in open market
transactions under a stock repurchase program through
March 31, 2013. Since the inception of this program in
2005, through July 2, 2010, the Company has repurchased
18 million shares for a total cost of $284 million.
The Company expects stock repurchases to be funded principally
by operating cash flows. The Company may continue to repurchase
stock as the Company deems appropriate and market conditions
allow. The Company did not make any repurchases of common stock
under the authorized stock repurchase program during 2010.
Subsequent to July 2, 2010 through August 13, 2010,
the Company repurchased 1.8 million shares for a total cost
of $50 million.
69
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Purchase Rights
On April 6, 2001, the Company adopted a plan to protect
shareholders rights in the event of a proposed takeover of
the Company. Under the plan, each share of the Companys
outstanding common stock carries one Right to Purchase
Series A Junior Participating Preferred Stock (the
Right). The Right enables the holder, under certain
circumstances, to purchase Series A Junior Participating
Preferred Stock of Western Digital at an exercise price of
$50.00 per share ten days after a person or group publicly
announces it has acquired or has tendered an offer for 15%, or
more, of the Companys outstanding common stock. The Rights
are redeemable by the Company at $0.001 per Right. The 2001
Rights plan expires April 6, 2011.
Stock
Reserved for Issuance
The following table summarizes all shares of common stock
reserved for issuance at July 2, 2010 (in millions):
|
|
|
|
|
|
|
Number
|
|
|
|
of Shares
|
|
|
Maximum shares issuable in connection with:
|
|
|
|
|
Outstanding awards and shares available for award grants
|
|
|
27.9
|
|
ESPP
|
|
|
5.4
|
|
|
|
|
|
|
Total
|
|
|
33.3
|
|
|
|
|
|
|
Pre-tax
Income
The domestic and foreign components of income before income
taxes were as follows for the three years ended July 2,
2010 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Foreign
|
|
$
|
1,418
|
|
|
$
|
459
|
|
|
$
|
812
|
|
Domestic
|
|
|
102
|
|
|
|
42
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
1,520
|
|
|
$
|
501
|
|
|
$
|
981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Tax Provision
The components of the provision for income taxes were as follows
for the three years ended July 2, 2010 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
$
|
9
|
|
|
$
|
13
|
|
|
$
|
12
|
|
Domestic-federal
|
|
|
101
|
|
|
|
(7
|
)
|
|
|
103
|
|
Domestic-state
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic-federal
|
|
|
37
|
|
|
|
24
|
|
|
|
(2
|
)
|
Domestic-state
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
138
|
|
|
$
|
31
|
|
|
$
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining net undistributed earnings from foreign subsidiaries
at July 2, 2010 on which no U.S. tax has been provided
amounted to approximately $4.0 billion. The net
undistributed earnings are intended to finance local operating
70
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
requirements and capital investments. Accordingly, an additional
U.S. tax provision has not been made on these earnings. The
tax liability for these earnings would approximate
$1.4 billion if the Company repatriated the
$4.0 billion in undistributed earnings from the foreign
subsidiaries.
Deferred
Taxes
Temporary differences and carryforwards, which give rise to a
significant portion of deferred tax assets and liabilities as of
July 2, 2010 and July 3, 2009 were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Sales related reserves and accrued expenses not currently
deductible
|
|
$
|
50
|
|
|
$
|
49
|
|
Accrued compensation and benefits not currently deductible
|
|
|
44
|
|
|
|
43
|
|
Domestic net operating loss (NOL) carryforward
|
|
|
52
|
|
|
|
50
|
|
Business credit carryforward
|
|
|
137
|
|
|
|
144
|
|
Other
|
|
|
47
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
330
|
|
|
|
338
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(58
|
)
|
|
|
(30
|
)
|
Other
|
|
|
(11
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(69
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
261
|
|
|
$
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Current portion (included in other current assets)
|
|
$
|
81
|
|
|
$
|
80
|
|
Non-current portion (included in other non-current assets)
|
|
|
249
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
330
|
|
|
|
338
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Current portion (included in other current assets)
|
|
|
(2
|
)
|
|
|
(11
|
)
|
Non-current portion (included in other non-current assets)
|
|
|
(67
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(69
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
261
|
|
|
$
|
288
|
|
|
|
|
|
|
|
|
|
|
In addition to the deferred tax assets presented above, the
Company had additional NOL benefits related to stock-based
compensation deductions of approximately $93 million and
$76 million at July 2, 2010 and July 3, 2009,
respectively. The increase in NOL benefits relates to the
current year stock based compensation deductions which will
result in a future benefit of $25 million, current year
utilization of the stock based NOL of $4 million, and a
reduction in the estimate of the prior year NOL utilization
related to stock based compensation of $4 million. This
$93 million will be recorded as a credit to shareholders
equity when an incremental benefit is recognized after
considering all other tax attributes available to the Company.
71
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Effective
Tax Rate
Reconciliation of the U.S. Federal statutory rate to the
Companys effective tax rate is as follows for the three
years ended July 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
U.S. Federal statutory rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
Tax rate differential on international income
|
|
|
(26
|
)
|
|
|
(30
|
)
|
|
|
(28
|
)
|
Tax effect of U.S. permanent differences
|
|
|
1
|
|
|
|
6
|
|
|
|
4
|
|
State income tax, net of federal tax
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
Income tax credits
|
|
|
(1
|
)
|
|
|
(8
|
)
|
|
|
(2
|
)
|
Other
|
|
|
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
9
|
%
|
|
|
6
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Holidays and Carryforwards
A substantial portion of the Companys manufacturing
operations in Malaysia and Thailand operate under various tax
holidays and tax incentive programs which will expire in whole
or in part at various dates through 2022. Certain of the
holidays may be extended if specific conditions are met. The net
impact of these tax holidays and tax incentives was to increase
the Companys net earnings by $560 million ($2.40 per
diluted share), $241 million ($1.07 per diluted share), and
$391 million ($1.73 per diluted share) in 2010, 2009, and
2008, respectively.
As of July 2, 2010, the Company had federal and state NOL
carryforwards of approximately $249 million and
$73 million, respectively. In addition, the Company had
various federal and state tax credit carryforwards of
approximately $204 million combined. The loss carryforwards
available to offset future federal and state taxable income
expire at various dates from 2020 to 2029 and 2015 to 2019,
respectively. Approximately $105 million of the credit
carryforwards available to offset future taxable income expire
at various dates from 2011 to 2028. The remaining amount is
available indefinitely. NOLs and credits relating to Komag,
which was acquired by the Company on September 5, 2007, are
subject to limitations under Section 382 and 383 of the
Internal Revenue Code. The Company does not expect these
limitations to result in a reduction in the total amount of NOLs
and credits ultimately realized.
Uncertain
Tax Positions
The Company recognizes liabilities for uncertain tax positions
based on a two-step process. First, the tax position is
evaluated for recognition by determining if it is more likely
than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any.
If the tax position is deemed more-likely-than-not to be
sustained, the tax position is then assessed to determine the
amount of benefit to be recognized in the financial statements.
The amount of the benefit that may be recognized is the largest
amount that has a greater than 50% likelihood of being realized
upon ultimate settlement. With the exception of certain
unrecognized tax benefits that are directly associated with the
tax position taken, unrecognized tax benefits are presented
gross in the Companys balance sheet. Interest and
penalties related to unrecognized tax benefits are recognized as
liabilities recorded for uncertain tax positions and are
recorded in the provision for income taxes. As of July 2,
2010, such interest and penalties were not material.
As of July 2, 2010, the Company had approximately
$230 million of unrecognized tax benefits.
72
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a tabular reconciliation of the total amounts
of unrecognized tax benefits for the year ended July 2,
2010 (in millions):
|
|
|
|
|
Unrecognized tax benefit at July 3, 2009
|
|
$
|
136
|
|
Gross increases related to prior year tax positions
|
|
|
|
|
Gross decreases related to prior year tax positions
|
|
|
(3
|
)
|
Gross increases related to current year tax positions
|
|
|
98
|
|
Settlements/lapse of statute of limitations
|
|
|
(1
|
)
|
|
|
|
|
|
Unrecognized tax benefit at July 2, 2010
|
|
$
|
230
|
|
|
|
|
|
|
The entire balance of unrecognized tax benefits at July 2,
2010, if recognized, would affect the effective tax rate.
The Company files U.S. Federal, U.S. state, and
foreign tax returns. For both federal and state tax returns,
with few exceptions, the Company is subject to examination for
fiscal years 2006 through 2009. In foreign jurisdictions, with
few exceptions, the Company is subject to examination for all
years subsequent to fiscal 2005. The Company is no longer
subject to examination by the Internal Revenue Service
(IRS) for periods prior to 2006, although carry
forwards generated prior to those periods may still be adjusted
upon examination by the IRS or state taxing authority if they
either have been or will be used in a subsequent period.
The IRS is currently examining fiscal years 2006 and 2007 for
the Company and calendar years 2005 and 2006 for Komag. In the
year ended July 2, 2010, the local tax authorities
completed, with no material adjustment, their examination of the
Companys French subsidiary for fiscal years 2003 through
2005.
Due to the risk that audit outcomes and the timing of audit
settlements are subject to significant uncertainty, the
Companys current estimate of the total amounts of
unrecognized tax benefits could increase or decrease for all
open tax years. As of July 2, 2010, it is not possible to
estimate the amount of change, if any, in the unrecognized tax
benefits that is reasonably possible within the next twelve
months. Any significant change in the amount of the
Companys unrecognized tax benefits would most likely
result from additional information or settlements relating to
the examination of the Companys uncertain tax positions.
|
|
Note 10.
|
Fair
Value Measurements
|
Financial assets and liabilities that are remeasured and
reported at fair value at each reporting period are classified
and disclosed in one of the following three levels:
Level 1. Quoted prices in active markets
for identical assets or liabilities.
Level 2. Inputs other than Level 1
that are observable, either directly or indirectly, such as
quoted prices for similar assets or liabilities; quoted prices
in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3. Inputs that are unobservable for
the asset or liability and that are significant to the fair
value of the assets or liabilities.
73
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents information about the
Companys financial assets that are measured at fair value
on a recurring basis as of July 2, 2010, and indicates the
fair value hierarchy of the valuation techniques utilized to
determine such value (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
458
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
458
|
|
U.S. Treasury securities
|
|
|
|
|
|
|
385
|
|
|
|
|
|
|
|
385
|
|
U.S. Government agency securities
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents
|
|
|
458
|
|
|
|
755
|
|
|
|
|
|
|
|
1,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction-rate securities
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
15
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
458
|
|
|
$
|
772
|
|
|
$
|
15
|
|
|
$
|
1,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents information about the
Companys financial assets that are measured at fair value
on a recurring basis as of July 3, 2009, and indicates the
fair value hierarchy of the valuation techniques utilized to
determine such value (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
468
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
468
|
|
U.S. Treasury securities
|
|
|
|
|
|
|
197
|
|
|
|
|
|
|
|
197
|
|
U.S. Government agency securities
|
|
|
|
|
|
|
79
|
|
|
|
1
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents
|
|
|
468
|
|
|
|
276
|
|
|
|
1
|
|
|
|
745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction-rate securities
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
18
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
468
|
|
|
$
|
281
|
|
|
$
|
19
|
|
|
$
|
768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds. The Companys money
market funds are funds that invest in U.S. Treasury
securities and are recorded within cash and cash equivalents in
the consolidated balance sheets. Money market funds are valued
based on quoted market prices.
U.S. Treasury Securities. The
Companys U.S. Treasury securities are investments in
Treasury bills with original maturities of three months or less
and are recorded within cash and cash equivalents in the
consolidated balance sheets. U.S. Treasury securities are
valued using a market approach which is based on observable
inputs including market interest rates from multiple pricing
sources.
74
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
U.S. Government Agency Securities. The
Companys U.S. Government agency securities are fixed
income securities sponsored by the U.S. Government, have
original maturities of three months or less and are recorded
within cash and cash equivalents in the consolidated balance
sheets. At July 3, 2009, the Company had $1 million in
U.S. Government agency securities classified as
available-for-sale
securities recorded within other current assets in the
consolidated balance sheets. U.S. Government agency
securities are valued using a market approach which is based on
observable inputs including market interest rates from multiple
pricing sources.
Auction-Rate Securities. The Companys
auction-rate securities have maturity dates through 2050, are
primarily backed by insurance products and are accounted for as
available-for-sale
securities. These investments are expected to be held until
secondary markets become available and as a result, are
classified as long-term investments and recorded within other
non-current assets in the consolidated balance sheets.
Auction-rate securities are valued using an income approach
which is based on a discounted cash flow model or a credit
default model. The inputs to the discounted cash flow model
include market interest rates and a discount factor to reflect
the illiquidity of the investments. The inputs to the credit
default model include market interest rates, yields of similar
securities, and probability-weighted assumptions related to the
creditworthiness of the underlying assets.
Foreign Exchange Contracts. The Companys
foreign exchange contracts are short-term contracts to hedge the
Companys foreign currency risk related to the Thai Baht,
Malaysian Ringgit, Euro and British Pound Sterling. Foreign
exchange contracts are classified within other current assets in
the consolidated balance sheets. Foreign exchange contracts are
valued using an income approach which is based on a present
value of future cash flows model. The market-based observable
inputs for the model include forward rates and credit default
swap rates.
The following table presents the changes in Level 3
financial assets measured on a recurring basis (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
Auction-rate
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Total
|
|
|
June 27, 2008
|
|
$
|
3
|
|
|
$
|
28
|
|
|
$
|
31
|
|
Maturities
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
Other-than-temporary
impairment recognized in earnings
|
|
|
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 3, 2009
|
|
|
1
|
|
|
|
18
|
|
|
|
19
|
|
Sales
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Maturities
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2, 2010
|
|
$
|
|
|
|
$
|
15
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no liabilities that were re-measured and
reported at fair value on a recurring basis during the years
ended July 2, 2010 and July 3, 2009.
|
|
Note 11.
|
Foreign
Exchange Contracts
|
As of July 2, 2010, the net amount of existing gains
expected to be reclassified into earnings within the next twelve
months was $11 million and the Company did not have any
foreign exchange contracts with credit-risk-related contingent
features. The Company opened $4.8 billion and
$1.4 billion, and closed $4.1 billion and
$1.8 billion, in foreign exchange contracts for the years
ended July 2, 2010 and July 3, 2009, respectively. The
fair value and balance sheet location as of July 2, 2010
and July 3, 2009 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Derivatives Designated as
|
|
Balance Sheet
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
Hedging Instruments
|
|
Location
|
|
|
Fair Value
|
|
|
Location
|
|
|
Fair Value
|
|
|
Location
|
|
|
Fair Value
|
|
|
Location
|
|
|
Fair Value
|
|
|
Foreign exchange contracts
|
|
|
Other current assets
|
|
|
$
|
17
|
|
|
|
Other current assets
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The impact on the consolidated financial statements during the
years ended July 2, 2010 and July 3, 2009 were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
Location of Gain (Loss)
|
|
|
Amount of Gain (Loss)
|
|
|
|
Recognized in
|
|
|
Reclassified from
|
|
|
Reclassified from
|
|
|
|
Accumulated OCI
|
|
|
Accumulated
|
|
|
Accumulated OCI into
|
|
Derivatives in Cash
|
|
on Derivatives
|
|
|
OCI into Income
|
|
|
Income
|
|
Flow Hedging Relationships
|
|
2010
|
|
|
2009
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Foreign exchange contracts
|
|
$
|
64
|
|
|
$
|
(33
|
)
|
|
|
Cost of revenue
|
|
|
$
|
55
|
|
|
$
|
(47
|
)
|
The total net realized transaction and forward exchange contract
currency gains and losses were not material to the consolidated
financial statements during the years ended July 2, 2010
and July 3, 2009. See Notes 1 and 10 for additional
disclosures related to the Companys foreign exchange
contracts.
|
|
Note 12.
|
Other
Intangible Assets
|
Other intangible assets consist primarily of technology acquired
in business combinations and are amortized on a straight-line
basis over the respective estimated useful lives of the assets.
In 2010, the Company acquired $11 million of intangibles as
a result of the Hoya acquisition, primarily related to a glass
substrate supply agreement and existing technology. Intangible
assets as of July 2, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amortization Period
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(in years)
|
|
|
(in millions)
|
|
|
(in millions)
|
|
|
(in millions)
|
|
|
Existing technology
|
|
|
9
|
|
|
$
|
127
|
|
|
$
|
45
|
|
|
$
|
82
|
|
Supply agreement
|
|
|
2
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
133
|
|
|
$
|
45
|
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2009, the Company acquired $24 million of intangibles as
a result of the SiliconSystems acquisition and recorded a
$5 million impairment charge related to a customer
relationship intangible asset acquired from Komag. Intangible
assets as of July 3, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amortization Period
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(in years)
|
|
|
(in millions)
|
|
|
(in millions)
|
|
|
(in millions)
|
|
|
Existing technology
|
|
|
9
|
|
|
$
|
124
|
|
|
$
|
35
|
|
|
$
|
89
|
|
Amortization expense for intangible assets was $12 million,
$11 million and $16 million for 2010, 2009 and 2008,
respectively. As of July 2, 2010, estimated future
amortization expense for intangible assets is approximately
$17 million for 2011, $16 million for 2012,
$13 million for 2013, $12 million for 2014, and
$12 million for 2015.
|
|
Note 13.
|
Restructuring
and Sale of Facility
|
During 2009, the Company announced and completed a restructuring
plan to realign its cost structure as a result of a softer
demand environment. This resulted in the closure of one of the
Companys hard drive manufacturing facilities in Thailand,
the disposal of its substrate manufacturing facility in Sarawak,
Malaysia, and headcount reductions throughout the world of
approximately 3,300 people. Restructuring costs totaled
$112 million and consisted of $81 million of asset
impairment charges, $27 million of employee termination
benefits and $4 million of contract termination and other
exit costs. Total cash expenditures related to the restructuring
activities were approximately $31 million. The asset
impairment charge of $81 million consisted of
$76 million primarily related to the land, buildings,
machinery and equipment at the manufacturing facilities in
Thailand and Malaysia and $5 million related to a customer
relationship intangible asset acquired from Komag. The
impairment charge is based on the excess of the carrying values
over the
76
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
estimated fair values of the assets. The fair values of the
land, buildings, and equipment were estimated using the market
approach. The intangible asset was valued using the income
approach.
During the fourth quarter of 2009, the Company sold its
substrate manufacturing facility, and related assets, in
Sarawak, Malaysia for net proceeds of approximately
$29 million, resulting in a gain of $18 million. The
closure and disposal of the Companys manufacturing
facilities was to realign its manufacturing capacity with the
Companys expectations regarding demand at that time. Total
restructuring charges of $112 million, partially offset by
the $18 million gain on sale of assets, is included in
restructuring and other, net within operating expenses in the
accompanying consolidated statements of income.
Magnetic
Media Operations
On June 30, 2010, the Company acquired the facilities,
equipment, intellectual property and working capital of the
magnetic media sputtering operations of Hoya. The acquisition is
intended to augment the Companys existing magnetic media
operations, strengthening its ability to meet anticipated growth
in demand for hard drives. The cost of the acquisition was
approximately $233